UNITED STATES COURT OF APPEALS

Tenth Circuit

Byron White United States Courthouse

1823 Stout Street

Denver, Colorado 80294

(303) 844-3157

Patrick J. Fisher, Jr. Elisabeth A. Shumaker

Clerk Chief Deputy Clerk

January 13, 1999

TO: ALL RECIPIENTS OF THE OPINION

RE: 97-1149, In re: Bayly Corp.

Filed on December 22, 1998

The court’s opinion filed in this matter on December 22, 1998, contains an

incomplete citation. On page 13 of the slip opinion, line 5, the citation to In re

Sunarhauserman, should appear as follows:

In re Sunarhauserman, 126 F.3d 811, 816-20 (6th Cir. 1997).

Please make the correction to your copy of the opinion.

Sincerely,

Patrick Fisher, Clerk of Court

Keith Nelson

Deputy Clerk
F I L E D

United States Court of Appeals

Tenth Circuit

DEC 22 1998

PATRICK FISHER

Clerk

PUBLISH

UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

BAYLY CORPORATION, 

Tax ID No. 84-0014030,

Debtor,

PENSION BENEFIT GUARANTY

CORPORATION,

Appellant,

v.

CYNTHIA SKEEN, Trustee,

Appellee.

No. 97-1149

Appeal from the United States District Court

for the District of Colorado

(D.C. No. 95-N-901)

Susan E. Birenbaum, Assistant General Counsel, Pension Benefit Guaranty

Corporation (Garth D. Wilson and Thomas T. Kim, Attorneys, Pension Benefit

Guaranty Corporation, James J. Keightley, General Counsel, Jeffrey B. Cohen,

Deputy General Counsel, and Israel Goldowitz, Assistant General Counsel,

Pension Benefit Guaranty Corporation, with her on the briefs), Washington, D.C.,

for appellant.

Christopher E. Bench, Bench & Associates, Denver, Colorado, for appellee.

Before ANDERSON, EBEL and HENRY, Circuit Judges.
1

 The parties do not dispute the material facts of this case, having

stipulated to most of the relevant facts.

- 2 -

EBEL, Circuit Judge.

After appellant Pension Benefit Guarantee Corporation (“PBGC”) assumed

control of the underfunded pension plan of the Bayly Corporation (“Debtor”), a

bankrupt company, PBGC filed a proof of claim in bankruptcy court for the

amount of the underfunding pursuant to 29 U.S.C. § 1362(b). PBGC sought

priority for its claim under the Bankruptcy Code as an administrative expense. 

The bankruptcy court denied PBGC administrative expense priority and the

district court affirmed the bankruptcy court. We affirm. Even though payment

for the amount of underfunding did not become due and owing until the postpetition termination of the plan, PBGC’s claim for unfunded benefit liabilities,

predicated solely on benefits accrued by Debtor’s employees as a result of prepetition labor, represented a pre-petition claim contingent upon plan termination. 

Consequently, the liability was not incurred by the bankruptcy estate and did not

qualify as an administrative expense under 11 U.S.C. § 503(b)(1)(B).

BACKGROUND

On December 14, 1990, Debtor filed for bankruptcy in the District of

Colorado under Chapter 11 of the Bankruptcy Code.1 Because Debtor failed to
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reorganize, the bankruptcy court converted Debtor’s case to a Chapter 7

liquidation on November 29, 1992. Appellee Cynthia Skeen was appointed

successor Trustee on January 29, 1993. 

Debtor had established the Defined Benefit Retirement Plan of Bayly

Corporation (the “Plan”) for its unionized employees in four western states,

including Colorado. Employees covered by the Plan provided no services to

Debtor after the bankruptcy case was filed. Under the Employee Retirement

Income Security Act of 1974 (“ERISA”), sponsors of single-employer pension

plans must make periodic contributions to their plans. See 26 U.S.C. § 412 and

29 U.S.C. § 1082. Plan sponsors also must pay premiums under the mandatory

pension plan termination insurance program established under Title IV of ERISA. 

See 29 U.S.C. §§ 1301-1461; see generally PBGC V. LTV Corp., 496 U.S. 633,

636-39 (1990). Debtor qualified as a plan sponsor under ERISA. 

PBGC, a wholly-owned United States government corporation, administers

the pension plan termination insurance program. See 29 U.S.C. §§ 1301-1461. 

Under ERISA, PBGC becomes the statutory trustee of any plan terminated

without sufficient funds to pay guaranteed benefits. See 29 U.S.C. §§ 1322,

1342, 1361. Upon termination of an underfunded plan, the plan sponsor incurs

liability to PBGC for a mandatory termination payment to reimburse PBGC for

the benefits PBGC must pay to the plan’s beneficiaries. See 29 U.S.C. § 1362. In
- 4 -

such circumstances, PBGC has a claim against the plan sponsor for the total

amount of the unfunded guaranteed benefits of the plan, subject to a limitation of

thirty percent of the net worth of the employer. See 29 U.S.C.

§§ 1342(d)(1)(B)(ii), 1362(b). If a liable employer fails to pay the amount of its

liability under § 1362(b) after demand is made by PBGC, PBGC can establish a

lien on all property of the liable party. See 29 U.S.C. § 1368(a). Such lien is to

be treated in the same manner as a tax due and owing the United States under the

Bankruptcy Code. See 29 U.S.C. § 1368(c)(2).

After Debtor filed for bankruptcy, PBGC and the Trustee executed an

agreement terminating the Plan and appointing PBGC as the Plan’s statutory

trustee pursuant to 29 U.S.C. §§ 1342(a) and 1348(a)(3). The agreement

established September 1, 1991 as the Plan’s Termination Date. As of the

Termination Date, the Plan had unfunded benefit liabilities of $1,097,800 and

Debtor had a net worth of $1,175,789.37, and thirty percent of Debtor’s net worth

is $352,736.81. 

PBGC then filed a proof of claim with the bankruptcy court for unfunded

benefit liabilities under 29 U.S.C. § 1362(b) in the amount of $352,736.81,

seeking administrative expense priority for its claim as a post-petition tax under

11 U.S.C. § 503(b)(1)(B)(I). The $352,736.81 figure represented 30 percent of

Debtor’s net worth, the largest amount PBGC could have asserted as a lien under
2

 PBGC asserted $745,036.20, the balance of the $1,097,800 in total

unfunded liabilities, as a general, unsecured claim under 29 U.S.C.

§ 1342(d)(1)(B)(ii). PBGC also sought payment of unpaid minimum funding

contributions due under 29 U.S.C. §§ 1082 and 1362(c) and unpaid insurance

premiums under 29 U.S.C. §§ 1306 and 1307. Those claims are not at issue on

appeal.

3

 Neither party argues that PBGC’s claim constitutes a tax listed in 11

U.S.C. § 507(a)(8). 

- 5 -

29 U.S.C. § 1368. However, because PBGC did not demand payment for the

unfunded guaranteed benefit liabilities pre-petition and because an automatic stay

had been issued by the bankruptcy court preventing any liens from ripening

against Debtor post-petition, PBGC failed to create a lien against Debtor under 29

U.S.C. § 1368.2 The Trustee objected to PBGC’s claim, and the bankruptcy court

held that PBGC was not entitled to administrative expense priority under the

Bankruptcy Code. The district court affirmed. PBGC now appeals, arguing only

that its $352,736.81 claim constitutes a post-petition tax under 11 U.S.C.

§ 503(b)(1)(B)(I) entitled to administrative expense priority. 

DISCUSSION

Section 507(a)(1) of the Bankruptcy Code grants first priority to certain

administrative expenses listed in § 503, including “any tax–(I) incurred by the

estate, except a tax of a kind specified in section 507(a)(8) of this title.”3 11

U.S.C. § 507(a)(1); see also 11 U.S.C. § 503(b)(1)(B). In order to qualify for

administrative expense priority as a tax under 11 U.S.C. § 503(b)(1)(B)(I),
4

 We have embraced a functional analysis to decide whether particular

payments may be deemed taxes. See In re Sunnyside Coal Co., 146 F.3d at 1276

(citing United States v. Dumler (In re Cassidy), 983 F.2d 161, 163 (10th Cir.

1992)). This functional analysis considers four factors which address whether the

payments are: (1) An involuntary pecuniary burden, regardless of name, laid upon

the individuals or property; (2) Imposed by, or under authority of the legislature;

(3) For public purposes, including the purposes of defraying expenses of

government or undertakings authorized by it; and (4) Under the police or taxing

power of the state. See In re Sunnyside Coal Co., 146 F.3d at 1276-77.

 The real dispute over whether this contribution should be considered a tax

focuses on factor three — whether ERISA contributions under 29 U.S.C. § 1362

are for a public purpose. In In re Sunnyside Coal Co., we held that premiums

assessed against a bankruptcy estate under the Coal Industry Retiree Health

Benefit Act of 1992, 26 U.S.C. §§ 9701-9722, are “taxes” entitled to

(continued...)

- 6 -

PBGC’s claim both must constitute a tax and must have been incurred by the

estate post-petition. See In re Sunnyside Coal Co., 146 F.3d 1273, 1278 (10th

Cir. 1998) (“Only taxes ‘incurred by the estate’ are administrative expenses. . . . 

However, until the petition is filed, there can be no estate; hence ‘first priority for

tax claims extends only to post-petition taxes.’”) (citing 4 Collier on Bankruptcy,

¶ 503.07[1] (15th ed. rev. 1998)). In denying administrative expense priority, the

bankruptcy court found that PBGC’s claim for $352,736.81 failed to meet either

of these two requirements. We review de novo the district court’s conclusions of

law. See State Bank v. Gledhill (In re Gledhill), 76 F.3d 1070, 1077 (10th Cir.

1996). We need not decide whether PBGC’s claim for unfunded benefit liabilities

can properly be characterized as a tax claim because, in any event, we agree that

PBGC’s claim was not incurred by the estate post-petition.4
4

(...continued)

administrative priority. 146 F.3d at 1274. We explained that Coal Act

contributions served a public purpose because their “purpose is to support the

government in its effort to maintain stability in the coal industry.” Id. at 1277. 

Arguably, if Coal Act contributions serve a public purpose because their “purpose

is to support the government in its effort to maintain stability in the coal

industry,” then ERISA contributions under 29 U.S.C. § 1362 serve a public

purpose because their purpose is to support the government in its effort to

maintain pension stability. Contributions under 29 U.S.C. § 1362 support the

government in its pension stabilization undertaking by defraying expenses of the

government. PBGC, a wholly-owned United States government corporation, has

its single-employer program funded by four sources, one of which includes 29

U.S.C. § 1362 contributions. 

On the other hand, we note that in In re CF&I Fabricators of Utah, Inc., 150

F.3d 1293, 1297 (10th Cir. 1998) (In re CF&I Fabricators (II)), this court held

that PBGC’s claim for unpaid minimum funding contributions under 26 U.S.C. §

412(n)(1)(B) did not qualify as a tax under the Bankruptcy Code because the

contributions served no public purpose. Id. at 1297-98. In re CF&I Fabricators

(II) may be distinguishable because in In re CF&I Fabricators (II) PBGC admitted

that the object of the contributions was not to defray government expenses, but

rather, to finance a private obligation. Id. at 1298. Here, PBGC has made no such

concession. Instead, in this case, PBGC argued that the object of contributions

under 26 U.S.C. § 1362 is to defray expenses of government. 

Given the tension between In re Sunnyside Coal Co. and In re CF&I

Fabricators (II), we find it expeditious simply to assume without deciding that

PBGC’s claim for unfunded benefit liabilities can properly be characterized as a

tax claim because we can affirm on the ground that PBGC’s claims were not

“incurred by the estate.”

- 7 -

We narrowly construe the priorities allowed under § 503(b) because “the

presumption in bankruptcy cases is that the debtor's limited resources will be

equally distributed among his creditors.” Isaac v. Temex Energy, Inc. (In re

Amarex, Inc.), 853 F.2d 1526, 1530 (10th Cir. 1988) (quoting Trustees of

Amalgamated Ins. Fund v. McFarlin’s, Inc., 789 F.2d 98, 100 (2d Cir. 1986)). A
- 8 -

claim is not entitled to priority under § 503 “simply because the right to payment

arises after the debtor in possession has begun managing the estate.” In re

Amarex, Inc., 853 F.2d at 1530. If a debtor becomes liable to a claimant before

the bankruptcy petition is filed, but the liability is contingent on the occurrence of

some future event, the claim to recover that debt is treated as a pre-petition claim

even if the condition does not occur and the right to payment does not arise until

after the bankruptcy petition is filed. Cf. id. (inquiry must focus on what

consideration supports the claim and whether it or any portion of it was prepetition).

For example, a claim by a guarantor against a debtor to recover postpetition payments made by the guarantor on behalf of the debtor under the terms

of a pre-petition guarantee agreement is treated as a pre-petition claim under 11

U.S.C. § 502(e)(2), which deals with the allowance and disallowance of

contingent claims. See 4 Collier on Bankruptcy, ¶ 502.06[3]. The claim’s prepetition status remains undisturbed even if the guarantor pays the creditor postpetition:

Such claims have the same priority as the underlying creditor’s claim, and

are not elevated in priority merely because the underlying creditor’s claim

was extinguished postpetition. To give a surety better than prepetition

status because it made payment to a prepetition creditor after the filing of a

bankruptcy petition would distort the scheme of the Bankruptcy Code with

respect to prepetition claims and postpetition administrative expense

claims.
- 9 -

Id. ¶ 502.06[3][a]. 

Courts have employed the same rationale in addressing the status of claims

against employers for amounts due as a termination payment upon withdrawal

from a multiemployer pension plan. Under the Multiemployer Pension Plan

Amendments Act (“MPPAA”), 29 U.S.C. §§ 1381 et seq., an employer who

participates in a multiemployer pension and employee benefit plan must make

periodic funding payments to the plan to cover the cost of benefits for that

employer’s employees. If the employer subsequently withdraws from the

multiemployer plan, the employer incurs a withdrawal liability. See 29 U.S.C.

§ 1381. The employer becomes obligated to make a lump sum payment of

additional money to the plan upon withdrawal in order to satisfy the employers’

proportionate share of the vested but unfunded benefits to be paid to employees

participating in the plan. See Susan Block-Lieb, Priority Claims, Including

Administrative Expense Claims, 546 PLI/Comm 697, 728-29 (1990) (citing

cases). Courts have uniformly concluded that withdrawal liability based on

benefits earned as a result of employees’ pre-petition labor, even if incurred postpetition, is a pre-petition contingent liability under bankruptcy law. See, e.g.,

Trustees of Amalgamated, 789 F.3d at 103-04; see also Block-Lieb, supra, at 728-

29. Thus, courts have denied priority as a post-petition administrative expense to

withdrawal liability claims predicated on pre-petition benefit liabilities, despite
- 10 -

the fact that the withdrawal occurred post-petition. See Trustees of

Amalgamated, 789 F.3d at 104 (citing cases).

Numerous other examples abound. First, claims for real estate taxes that

accrue during the pre-petition tax year but that are not calculated or do not

become payable until a post-petition date are still considered pre-petition claims. 

See In re Mort Hall Acquisition, Inc., 181 B.R. 860, 864 (Bankr. S.D. Tex. 1994)

(county had pre-petition unliquidated right to payment of ad valorem taxes on

business personal property owned by debtor, contingent upon subsequent postpetition act of assessment); see also In the Matter of Handy Andy Home

Improvement Ctrs., Inc., 144 F.3d 1125 (7th Cir. 1998) (pro-rating claim for

tenants obligation for real estate taxes between taxes that accrued on property

during tenant’s pre-petition and post-petition occupancy).

Second, income taxes on income earned during a taxable year prior to the

commencement of bankruptcy proceedings constitute pre-petition claims, even

though the taxes are not due and payable until post-petition. See In the Matter of

O.P.M. Leasing Servs., Inc., 68 B.R. 979, 983-85 (Bankr. S.D.N.Y. 1987) (any

tax liability on income earned by the pre-petition debtor is not entitled to

administrative expense priority); cf. In re Pacific-Atlantic Trading Co., 64 F.3d at

1301 (“tax on income should be treated as ‘incurred’ on the last day of the taxable

period”).
- 11 -

Third, unemployment compensation taxes accrue pre-petition even though

the liability for the taxes is not triggered until post-petition, where the taxes are

predicated on the pre-petition work of debtor’s employees and neither debtor nor

trustee had any post-petition business operations. See In re Northeastern Ohio

Gen. Hosp. Ass’n, 126 B.R. 513, 515 (Bankr. N.D. Ohio 1991).

Fourth, tax reimbursement claims are pre-petition where the agreement to

pay existed pre-petition even though the tax obligation matured post-petition. See

In re Ames Dep’t Stores, Inc., 136 B.R. 353, 356 (Bankr. S.D.N.Y. 1992). 

Similarly, this court in In re CF&I Fabricators (II) denied administrative

priority to PBGC’s claims against a plan sponsor for minimum funding

contributions under ERISA based on the plan’s liabilities for benefits accrued by

employees as a result of pre-petition labor. 150 F.3d at 1298-1300. The court

held that the liability constituted a contingent, pre-petition claim. See id. at 1299;

see also In re Kent Plastics Corp., 183 B.R. 841, 846 (Bankr. S.D. Ind. 1995) (the

obligation to pay minimum funding requirements under ERISA is a pre-petition

debt “insofar as it relates to pre-petition labor by the debtor’s employees”).

The same approach applies to tax claims under § 503(b)(1)(B). “Although

the Bankruptcy Code does not define the term ‘incurred,’ the Circuits addressing

the issue have uniformly held a tax is incurred when it accrues.” In re Sunnyside

Coal Co., 146 F.3d at 1278. It is not sufficient that a tax merely becomes payable
- 12 -

post-petition in order to qualify as an administrative expense under

§ 503(b)(1)(B). See Towers v. United States (In re Pacific-Atlantic Trading Co.),

160 B.R. 136, 139 (N.D. Cal. 1993) (denying administrative expense priority for

corporate income taxes where all “taxable activity occurred prior to [appointment

of trustee] and was connected with the debtor company, not with the bankrupt

estate,” in which case awarding such priority would “subvert the intended purpose

of Section 503.”), aff’d in part, rev’d in part on other grounds, 64 F.3d 1292 (9th

Cir. 1995); In re Northeastern Ohio Gen. Hosp. Ass’n, 126 at 514 (section

503(b)(1)(B) “has been interpreted to preclude administrative claim status for

taxes not incurred in post-petition operation of a debtor’s business.”). By

contrast, taxes that have been deemed to be post-petition include “taxes on capital

gains from sales of property by the trustee and taxes on income earned by the

estate.” S. Rep. No. 95-989, at 66 (1978), reprinted in 1978 U.S.C.C.A.N. 5787,

5852. 

In this case, liabilities for benefits under the pension plan accrued as

employees earned a vested right to those benefits as compensation for services

rendered to their employer. See 4 Collier on Bankruptcy, ¶ 503.06[7][e]. Where

the employees cease performing services for the employer before the employer

files for bankruptcy, the amount of benefits due under a pension plan, and the

employer’s resulting liability for those benefits, become fixed pre-petition. Under
- 13 -

this rationale, the court in In re Sunarhauserman, 126 F.3d 811, 816-20 (6th Cir.

1997) held that PBGC’s claim against the employer for minimum funding

contributions to the pension plan predicated on pension benefits owed as a result

of pre-petition labor by employees constituted a pre-petition obligation.

Here, all liabilities under the Plan stem from nonforfeitable benefits

accrued by employees as a result of pre-petition labor. We find no reason to treat

claims for plan termination liability any different than claims for withdrawal

liability. The consideration supporting PBGC’s claim is the same as that

supporting the right to pension benefits itself, the past labor of Debtor’s

employees. Plan termination simply matured Debtor’s pre-petition contingent

liability to fund the Plan adequately. Thus, PBGC’s claim is not entitled to

administrative expense priority as a post-petition tax.

A situation almost identical to the case before us was addressed in PBGC v.

LTV Corp. (In re Chateaugay Corp.), 87 B.R. 779 (S.D.N.Y. 1988), aff’d on other

grounds, 875 F.2d 1008 (2d Cir. 1989), rev’d on other grounds, 496 U.S. 633

(1990). There, the court found that PBGC’s right to payment of unfunded benefit

liabilities at plan termination constituted:

a classic example of a contingent claim–one which the debtor will be called

upon to pay only upon the occurrence or happening of an extrinsic event. If

the extrinsic event occurs post-petition, the contingent claim simply

becomes a liquidated one; it, however, is not thereby elevated to the status

of a post-petition claim. Here, the extrinsic event was plan termination,

which simply fixed [debtor’s] liability to PBGC.
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Id. at 797 (internal quotations and citations omitted). The court analogized

PBGC’s claims for termination payments to claims for withdrawal liability for

plan benefits earned through pre-petition employment, noting that courts

uniformly consider such withdrawal liability to constitute a pre-petition claim. 

See id. at 798-99; see also In the Matter of United Merchants and Mfrs., Inc., 166

B.R. 234, 235-36 (Bankr. D. Del. 1994) (“Withdrawal liability [under ERISA] is

the multiemployer plan equivalent of single-employer plan termination liability.”). 

The court concluded that “PBGC has not offered a compelling reason why the

post-petition termination of a pension plan should displace the actual service of

employee-beneficiaries as the ‘acts’ that give rise to a sponsor’s pension

liabilities.” In re Chateaugay Corp., 87 B.R. at 799.

Because the Supreme Court reversed the district court’s decision in In re

Chateaugay Corp. on other grounds and did not address the question at issue in

this case, the Supreme Court’s opinion did not undermine the persuasive value of

the district court’s holding. We note that even after the Supreme Court’s opinion,

several courts have continued to rely on the reasoning in In re Chateaugay Corp.

regarding the pre-petition status of contingent liabilities. See Houbigant, Inc. v.

ACB Mercantile, Inc. (In re Houbigant, Inc.), 188 B.R. 347, 355 (Bankr S.D.N.Y.

1995); In re Valley Steel Prods. Co., 142 B.R. 337, 342 (Bankr. E.D. Mo. 1992);

Cohen v. Drexel Burnham Lambert Group, Inc. (In re Drexel Burnham Lambert
- 15 -

Group, Inc.), 138 B.R. 687, 695 n.12 (Bankr. S.D.N.Y. 1992). We too find the

reasoning in In re Chateaugay Corp. persuasive.

PBGC argues that clear language of ERISA requires a different result. 

Section 1362(a) provides that “any person who is, on the termination date, a

contributing sponsor of the plan or a member of such contributing sponsor’s

controlled group shall incur liability” to PBGC in the amount of unfunded benefit

liabilities. PBGC reads the statute to mean that liability under § 1362 only arises 

as of a plan’s termination date. As a result, PBGC contends that its claim neither

accrued nor was incurred by Debtor until the Termination Date, or post-petition. 

However, although ERISA determines if PBGC has a claim for payment

against a plan sponsor, the principles of bankruptcy law control as to when

liability attaches.

It is well established that the Bankruptcy Code, not ERISA, determines the

priority of claims against a bankrupt estate. United States v. Embassy

Restaurant, Inc., 359 U.S. 29 (1959) (‘We construe the priority section of

the Bankruptcy Act, not these statutes. It specifically fixes the priority of

classes of creditors.’). Thus, regardless of the substantive law on which the

claim is based, the proper standard for determining that claim’s

administrative priority looks to when the acts giving rise to a liability took

place.

In re Sunarhauserman, 126 F.3d at 818; see also In re Finley, Kumble, Wagner,

Heine, Underberg, Manley, Myerson & Casey, 160 B.R. 882, 892 (Bankr.

S.D.N.Y. 1993) (“The time a claim arises is determined by bankruptcy law in the

absence of an overriding nonbankruptcy federal policy or interest.”). 
- 16 -

Consequently, PBGC’s contention that, because it had no right to collect

the termination payment under ERISA prior to the bankruptcy petition filing date,

its claim for payment is entitled to administrative priority, is unpersuasive. “All

claims against the debtor, whether or not contingent or unliquidated, will be dealt

with in the bankruptcy case.” In the Matter of O.P.M. Leasing Servs., Inc., 68

B.R. at 984 (quotation and citation omitted); see also 11 U.S.C. § 104 (the

definition of a claim covered by the bankruptcy case includes a “right to payment,

whether or not such right is reduced to judgment, liquidated, unliquidated, fixed,

contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or

unsecured.”). Under the Bankruptcy Code, we find that PBGC’s claim for

unfunded benefit liabilities predicated on pre-petition employment represents a

pre-petition contingent claim not entitled to administrative expense priority.

Therefore, we AFFIRM the district court judgment.