Although this appeal was argued before theBankruptcyAppellate Panel of the Sixth Circuit 1

on May 2, 2007, in January 2008 the Panel was reconstituted to include Judge Aug. At that time,

the parties were given the opportunity to reargue the case or otherwise supplement the record. The

parties declined to do so. 

ELECTRONIC CITATION: 2008 FED App. 0018P (6th Cir.)

File Name: 08b0018p.06

BANKRUPTCY APPELLATE PANEL OF THE SIXTH CIRCUIT

In re: HNRC DISSOLUTION CO. f/k/a

HORIZON NATURAL RESOURCES

COMPANY, et al.,

Debtors.

______________________________________

UNITED MINE WORKERS OF AMERICA 1974

PLAN AND TRUST, et al., 

Appellants,

v.

LEXINGTON COAL COMPANY, LLC, 

Appellee.

______________________________________

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No. 06-8067

Appeal from the United States Bankruptcy Court

for the Eastern District of Kentucky at Ashland.

No. 02-14261.

Argued: May 2, 20071

Decided and Filed: November 4, 2008

Before: AUG, GREGG, and PARSONS, Bankruptcy Appellate Panel Judges.
-2-

____________________

COUNSEL

ARGUED: John C. Goodchild, III, MORGAN, LEWIS & BOCKIUS, LLP, Philadelphia,

Pennsylvania, for Appellants. Gregory R. Schaaf, GREENEBAUM DOLL & McDONALD PLLC,

Lexington, Kentucky, for Appellee. ON BRIEF: John C. Goodchild, III, MORGAN, LEWIS &

BOCKIUS, LLP, Philadelphia, Pennsylvania, Mark Murphy, Richard C. Welch, MOONEY,

GREEN, BAKER & SAMDON, P.C., Washington, D.C., Jerome J. Metz, Jr., PORTER WRIGHT

MORRIS & ARTHUR LLP, Cincinnati, Ohio, for Appellants. GregoryR. Schaaf, John F. Billings,

GREENEBAUM DOLL & McDONALD PLLC, Lexington, Kentucky, C.R. Bowles, Benjamin J.

Evans, Raja J. Patil, GREENEBAUM DOLL & McDONALD PLLC, Louisville, Kentucky, for

Appellee.

____________________

OPINION

____________________

JAMES D. GREGG, Bankruptcy Appellate Panel Judge. Horizon Natural Resources

Company and several of its subsidiaries and affiliates (collectively, the “Debtors”) participated in

a multiemployer pension plan, the United Mine Workers of America 1974 Pension Plan and Trust

(“1974 Plan”), until the Debtors terminated operations approximately two years after filing their

chapter 11 cases. Termination of the Debtors’ operations constituted a complete withdrawal from

the 1974 Plan and caused the Debtors to incur withdrawal liability under ERISA. The 1974 Plan

appeals the bankruptcy court’s order denying its application for allowance of a $36,248,771

administrative expense claim. The 1974 Plan asserts that this amount represents the portion of the

Debtors’ total withdrawal liability that relates to the Debtors’ postpetition operations. For the

reasons that follow, the bankruptcy court’s order is AFFIRMED.

I. ISSUES ON APPEAL

The overarching issue in this appeal appears to be deceptively simple: 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 expense priority? However, the answer

to this broad question requires consideration of two complex and difficult sub-issues: (1) did the

bankruptcy court err when it concluded that the 1974 Plan failed to establish that the withdrawal
-3-

liability, or a portion thereof, represented a “direct and substantial benefit” to the Debtors’

bankruptcy estate under the “benefit to the estate” test established by the United States Court of

Appeals for the Sixth Circuit in Pension Benefit Guar. Corp. v. Sunarhauserman, Inc. (In re

Sunarhauserman, Inc.), 126 F.3d 811, 816 (6th Cir. 1997); and (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 (1968), may apply to the

withdrawal liability claim?

II. JURISDICTION AND STANDARD OF REVIEW

The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this appeal.

The United States District Court for the Eastern District of Kentucky has authorized appeals to the

Panel, and a final order of the bankruptcy court may be appealed by right under 28 U.S.C.

§ 158(a)(1). For the purpose of an appeal, an order is final if it “ends the litigation on the merits and

leaves nothing for the court to do but execute the judgment.” Midland Asphalt Corp. v. United

States, 489 U.S. 794, 798, 109 S. Ct. 1494, 1497 (1989). The bankruptcy court’s order denying the

1974 Plan’s application for an administrative expense claim is a final order. Volvo Commercial Fin.

LLC the Americas v. Gasel Transp. Lines, Inc. (In re Gasel Transp. Lines, Inc.), 326 B.R. 683, 685

(B.A.P. 6th Cir. 2005) (“An order determining that a claim is not entitled to administrative expense

priority constitutes a final order.”). 

This Panel reviews the bankruptcy court’s denial of administrative expense priority status

for an abuse of discretion. See Beneke Co. v. Econ. Lodging Sys., Inc. (In re Econ. Lodging Sys.,

Inc.), 234 B.R. 691, 693 (B.A.P. 6th Cir. 1999). The bankruptcy court’s ruling on the 1974 Plan’s

motion for reconsideration is also reviewed under the abuse of discretion standard. See Eglinton v.

Loyer (In re G.A.D., Inc.), 340 F.3d 331, 334 (6th Cir. 2003) (denial of a Rule 60(b) motion is

reviewed for abuse of discretion); Heath v. Am. Express Travel Related Servs. Co. (In re Heath), 331

B.R. 424, 429 (B.A.P. 9th Cir. 2005) (denial of a motion to reconsider allowance or disallowance

of a claim under Rule 3008 is reviewed for abuse of discretion). “An abuse of discretion occurs only

when the trial court relies upon clearly erroneous findings of fact or when it improperly applies the

law or uses an erroneous legal standard.” Schmidt v. Boggs (In re Boggs), 246 B.R. 265, 267 (B.A.P.
-4-

6th Cir. 2000). “The question is not how the reviewing court would have ruled, but rather whether

a reasonable person could agree with the bankruptcy court’s decision; if reasonable persons could

differ as to the issue, then there is no abuse of discretion.” Mayor of Baltimore, Md. v. W. Va. (In

re Eagle-Picher Indus., Inc.), 285 F.3d 522, 529 (6th Cir. 2002); Lebovitz v. Hagemeyer (In re

Lebovitz), 360 B.R. 612, 615 (B.A.P. 6th Cir. 2007).

III. FACTS

The Debtors were parties to collective bargaining agreements with the United Mine Workers

of America (“UMWA”). These agreements, known as National Bituminous Coal Wage Agreements

(“NBCWAs”), governed the terms and conditions of employment of the UMWA-represented miners

by establishing applicable wages and benefits to be paid to the miners by the Debtors. Among the

benefits established under the NBCWAs was the requirement that the Debtors participate in the 1974

Plan. The 1974 Plan is an irrevocable trust established pursuant to § 302(c)(5) of the LaborManagement Relations Act, see 29 U.S.C. § 186(c)(5), and is also a multiemployer defined benefit

pension plan under § 3(37)(A) of ERISA, see 29 U.S.C. § 1002(37)(A). Miners employed by the

Debtors accrued pension and death benefits in the 1974 Plan for every hour they worked under the

NBCWAs.

ERISA requires pension plans, such as the 1974 Plan, to maintain assets sufficient to meet

future pension liabilities. See 29 U.S.C. § 1052. To meet this requirement, participating employers

are subject to two distinct types of liability – periodic contributions and withdrawal liability. The

periodic contribution rates are established through collective bargaining and are set forth in the

NBCWAs. Under the NBCWAs, the contributions required by the 1974 Plan were based upon the

hours worked by each UMWA miner. Withdrawal liability, by contrast, is imposed by federal

statute, see 29 U.S.C. § 1381, and represents an employer’s obligation upon its withdrawal from a

multiemployer pension plan to pay its proportionate share of the plan’s total unfunded vested
 Section 1381 states as follows: 2

(a) If an employer withdraws from a multiemployer plan in a complete withdrawal

or a partial withdrawal, then the employer is liable to the plan in the amount

determined under this part to be the withdrawal liability.

(b) For purposes of subsection (a) of this section– 

(1) The withdrawal liability of an employer to a plan is the amount

determined under section 1391 of this title to be the allocable amount of

unfunded vested benefits, adjusted– 

(A) first, by any de minimis reduction applicable under section 1389

of this title,

(B) next, in the case of a partial withdrawal, in accordance with

section 1386 of this title,

(C) then, to the extent necessary to reflect the limitation of annual

payments under section 1399(c)(1)(B) of this title, and

(D) finally, in accordance with section 1405 of this title.

(2) The term “complete withdrawal” means a complete withdrawal described

in section 1383 of this title.

(3) The term “partial withdrawal” means a partial withdrawal described in

section 1385 of this title.

29 U.S.C. § 1381.

 Because the Debtors filed their bankruptcy petitions prior to October 17, 2005, this appeal 3

is governed by the Bankruptcy Code without regard to the amendments made by the Bankruptcy

Abuse Prevention and Consumer Protection Act of 2005. All statutory references are to the

Bankruptcy Code, 11 U.S.C. §§ 101 to 1330 (2004), unless otherwise noted.

-5-

benefits. Unfunded vested benefits (sometimes referred to as “UVBs”) are defined under the statute

2

as the difference between the present value of vested benefits and the current value of the plan’s

assets. See 29 U.S.C. § 1391.

On November 13 and 14, 2002, the Debtors filed voluntary petitions for relief under chapter

11 of the Bankruptcy Code. The Debtors operated their businesses as debtors-in-possession for 3

almost two years after their cases were commenced. During that time, they employed over 1,000

UMWA-represented employees. The Debtors estimate that their employees worked a combined

total of 2,976,962 hours during the postpetition period. 
 The Debtors sold their going-concern operations for more than $481 million in secured

4

claims and $304 million in cash.

 In August 2004, the bankruptcy court granted the Debtors’ motion requesting authority to 5

reject all of their collective bargaining agreements. Pursuant to the bankruptcy court’s order, the

Debtors rejected the NBCWAs on or around September 30, 2004. The rejection coincided with the

closing of the sale of the Debtors’ assets.

-6-

While operating postpetition, the Debtors paid all necessary wages and made all required

contributions for benefits due to employees under the NBWCAs. In fact, during the terms of the

1998 and 2002 NBCWAs, participating employers, including the Debtors, were not required to make

any contributions to the 1974 Plan. Because the 1974 Plan was fully funded at that time, pursuant

to a provision in the 1998 NBCWA, requisite employer contributions were zero cents per hour.

However, in the plan year ending June 30, 2001, an actuarial funding deficit arose between the future

value of vested benefits and the 1974 Plan assets. According to the 1974 Plan, the deficit resulted

from a number of factors, including a dip in the stock market, lack of incoming contributions, and

changes in pensions. As a result, the 1974 Plan began to report unfunded vested benefits during the

plan year ending June 30, 2001. 

After unsuccessfully attempting to reorganize during the postpetition period, the Debtors

determined to sell substantially all of their assets. On July 11, 2004, the Debtors filed their Third

Amended Joint Plan of Reorganization and Third Amended Joint Plan of Liquidation (the “Chapter

11 Plans”). As contemplated by the Chapter 11 Plans, a court-approved auction sale of the Debtors’

assets was held on August 17, 2004. Lexington Coal Company, LLC (“Lexington Coal”), the

Appellee in the present appeal, was among the successful purchasers. On September 16, 2004, the

bankruptcy court entered orders confirming the Chapter 11 Plans. On September 30, 2004, the

Debtors consummated the sale of their assets to the approved purchasers, including Lexington Coal;4

the Chapter 11 Plans became effective; and the Debtors rejected the NBCWAs. In accordance with 5

the court’s orders confirming the Chapter 11 Plans, the Debtors were then deemed dissolved.

The 1974 Plan asserts, and Lexington Coal does not dispute, that the Debtors terminated

covered operations on September 27, 2004. According to the 1974 Plan, this cessation of operations
 Under 29 U.S.C. § 1391, the “charge-determination” section of ERISA, the withdrawal

6

liability calculation is to be made, “not as of the day of withdrawal, but as of the last day of the plan

year preceding the year during which the employer withdrew . . . .” Milwaukee Brewery Workers’

Pension Plan v. Jos. Schlitz Brewing Co., 513 U.S. 414, 417-18, 115 S. Ct. 981, 986 (1995) (citing

29 U.S.C. §§ 1391(b)(2)(A)(ii), (b)(2)(E)(i), (c)(2)(C)(i), (c)(3)(A) and (c)(4)(A) (emphasis in

original)). 

-7-

constituted a complete withdrawal from the 1974 Plan during the Plan year ending June 30, 2004.6

Because the 1974 Plan had unfunded vested benefits at that time, the Debtors’ withdrawal from the

1974 Plan gave rise to withdrawal liability under ERISA. 

On December 27, 2004, the 1974 Plan filed an administrative expense claim for the

postpetition portion of the Debtors’ withdrawal liability. The 1974 Plan’s determination of the

amount of the Debtors’ postpetition withdrawal liability required a three-step calculation. First, the

1974 Plan calculated the total amount of the Plan’s unfunded vested benefits at the time of the

Debtors’ withdrawal. Next, the 1974 Plan determined what portion of the Plan’s total unfunded

vested benefits was attributable to the Debtors. To accomplish this the 1974 Plan utilized a modified

version of the “Rolling-5” method set forth in the withdrawal liability statute. The 1974 Plan divided

the hours worked by the Debtors’ employees during the five years preceding withdrawal by the total

hours worked by all employees during that same period. The resulting percentage was then

multiplied by the 1974 Plan’s total unfunded vested benefits to determine the Debtors’ total

withdrawal liability. In accordance with this calculation, the 1974 Plan asserted that the Debtors’

total withdrawal liability as of June 30, 2004, was $224,986,733. 

The 1974 Plan then determined what portion of the Debtors’ total withdrawal liability was

attributable to work performed by the Debtors’ employees postpetition. The 1974 Plan calculated

this amount by dividing the hours worked by the Debtors’ employees postpetition by the total hours

worked by the Debtors’ employees during the five years immediately preceding withdrawal. This

calculation resulted in approximately 8.7% of the total withdrawal liability being allocated to the

postpetition period. Accordingly, the 1974 Plan alleged that 8.7% of the Debtors’ $224,986,733 total

withdrawal liability, or $19,580,146, was entitled to treatment as an administrative expense claim.
 Pursuant to the bankruptcy court’s orders confirming the Chapter 11 Plans, Lexington Coal 7

has standing to object to administrative expense claims.

Based on the revised interest rate utilized by the 1974 Plan, the 1974 Plan’s total unfunded 8

vested benefits at the end of the 2004 Plan year were approximately $1.8 billion. Had the interest

rate assumption not been changed, the 1974 Plan’s total unfunded vested benefits at the end of the

2004 Plan Year would have been approximately $2.1 billion, and the Debtors’ total withdrawal

liability claim would have been approximately $163 million.

 After the 1974 Plan filed its Amended Claim, the bankruptcy court requested further 9

information from the 1974 Plan, including: a statement of the amount of the withdrawal liability as

of June 30, 2002, and as of June 30, 2004; a statement of the amount of the withdrawal liability that

would have been assessed against the Debtors if withdrawal had occurred on the date the chapter 11

petitions were filed; and an explanation of the interest rate used in calculating the withdrawal

liability reflected in the 1974 Plan’s original claim. On September 14, 2005, the 1974 Plan provided

the information requested by the court.

-8-

On March 17, 2005, Lexington Coal filed an objection to the 1974 Plan’s administrative

expense claim. Lexington Coal asserted that the 1974 Plan’s claim did not qualify as an 7

administrative expense because the withdrawal liability did not directly and substantially benefit the

Debtors’ estate. Following a status conference on May 19, 2005, the bankruptcy court issued a

scheduling order stating that it would “deal first with legal issues that may avoid the need for

discovery.” (J.A. at tab 7.) Accordingly, the court instructed the parties to brief the legal issues set

forth in the objection. 

After legal memoranda were filed by the 1974 Plan and Lexington Coal, the 1974 Plan

responded by filing an amended administrative expense claim seeking $36,248,771 as postpetition

withdrawal liability (“Amended Claim”). The Amended Claim listed the total amount of withdrawal

liability attributable to the Debtors as $138,354,090, a decrease from the original calculation of

$224,986,733. Attachments to the Amended Claim stated that this decrease derived from a change

in the interest rate assumption the 1974 Plan applied to calculate its unfunded vested benefits.8

However, the amount the 1974 Plan sought as an administrative expense increased from

$19,580,146 to $36,248,771. The 1974 Plan explained that the original claim utilized an inaccurate

withdrawal date, which caused the hours worked during a full year of the postpetition period to be

excluded from the calculation. Correction of this error resulted in 26.2%, rather than 8.7%, of the

Debtors’ total withdrawal liability being allocated to the postpetition period.9
 The bankruptcy court disallowed the withdrawal liability claim under 11 U.S.C. § 503(b). 10

Therefore, it declined to address Lexington Coal’s assertion that the claim resulted from the Debtors’

rejection of the collective bargaining agreements and constituted a prepetition unsecured claim under

11 U.S.C. § 365(g) or § 502(g). We also see no reason to address § 365(g) or § 502(g) in this appeal.

-9-

On November 7, 2005, the bankruptcy court issued a Memorandum Opinion denying

administrative expense priority for the Amended Claim. The court began its analysis by noting that

the Debtors’ withdrawal liability did not arise until the Debtors ceased business operations, almost

two years after the filing of their chapter 11 cases. However, the court explained that the liability

was not automatically considered an administrative expense “simply because [it] accrued after the

filing of the bankruptcy proceeding.” (J.A. at tab 14, p. 7.) The Debtors were still required to show

that the withdrawal liability provided a direct and substantial benefit to the estate. Although the

bankruptcy court acknowledged the possibility of pro-rating the withdrawal liability for purposes of

classifying a portion of the liability as an administrative expense, it considered the use of past

contribution experience in making such a calculation problematic. The court observed that the

liability had “accumulated over many years” and that the amount of the liability was “clearly

dependent, among other things, upon the success of the [1974 Plan’s] investments as administered

by the trustees of the fund, and contributions by other employers.” (J.A. at tab 14, p. 6.) To illustrate

this point, the court noted that the Debtors’ total withdrawal liability as of the chapter 11 petition

date, November 13, 2002, would have been approximately $145,307,051. On the date of the

Debtors’ actual withdrawal from the 1974 Plan, September 27, 2004, their total withdrawal liability

was $138,354,090. Therefore, the Debtors’ total withdrawal liability decreased by approximately

$7 million during the pendency of the Debtors’ chapter 11 case. The court further suggested that the

Debtors’ method of calculation would result in “more and more of the withdrawal liability [being]

converted . . . to an administrative claim” simply by the passage of time, “without any demonstration

of benefit to the estate.” (J.A. at tab 14, p. 9.) Because no additional indebtedness was created

during the administration of the Debtors’ estate, the court concluded that the 1974 Plan had failed

to demonstrate that the withdrawal liability upon which the Amended Claim was based directly and

substantially benefitted the Debtors’ estate. 

10

On November 17, 2005, the 1974 Plan filed its Motion for Reconsideration pursuant to Rule

3008, or in the Alternative, to Alter or Amend Judgment, or for Relief from Judgment pursuant to

Rules 7052, 9023 and 9024 (“Motion to Reconsider”). The bankruptcy court held a hearing
-10-

regarding the Motion to Reconsider on January 19, 2006. At the hearing, over the objection of

Lexington Coal, the bankruptcycourt allowed the 1974 Plan to present evidence as to factual matters

concerning the calculation of the Amended Claim. This evidence included testimony from the 1974

Plan’s comptroller and an actuarial consultant, both of whom explained that the decrease in the

Debtors’ total withdrawal liability during the pendency of their chapter 11 cases resulted primarily

from a change in actuarial assumptions. Specifically, the witnesses testified that in November 2004,

the 1974 Plan changed the interest rate assumption it applied to calculate the 1974 Plan’s unfunded

vested benefits. This new interest rate applied to all withdrawals occurring after June 30, 2004, and

the effect of the revised assumption was to lower the 1974 Plan’s total unfunded vested benefits.

Under the new interest rate, the Debtors’ total withdrawal liability as of the withdrawal date,

June 30, 2004, was approximately $138 million. However, according to the 1974 Plan’s comptroller,

the Debtors’ total withdrawal liability would have been approximately $163 million had the prior

interest rate assumption remained in effect. If the Debtors had withdrawn from the 1974 Plan as of

the petition date, their total withdrawal liability would have been approximately $145 million.

Consequently, but for the change in interest rate assumption, the Debtors’ total withdrawal liability

would have increased (from $145 million to $163 million) during the pendency of their chapter 11

cases. Because the decrease in the Debtors’ total withdrawal liability resulted from the change in

interest rate assumption, the 1974 Plan asserted that the decrease was not indicative of the benefit

(or lack thereof) provided to the Debtors’ bankruptcy estate.

At the hearing on the Motion to Reconsider, the 1974 Plan also argued that, to the extent the

bankruptcy court held that the withdrawal liability claim could have some potential benefit to the

estate, the 1974 Plan should be permitted to present additional evidence in support of its

quantification of that benefit. In this respect, the 1974 Plan stated that the Rolling-5 method was not

the only way to calculate the portion of the Debtors’ total withdrawal liability that should be

allocated to the postpetition period. As an alternative to the Rolling-5 method, the 1974 Plan

suggested that the allocation could be made by evaluating how much pension credit the Debtors’

employees earned during the two years the Debtors operated postpetition. 

On March 6, 2006, the bankruptcy court issued a second Memorandum Opinion addressing

the Motion to Reconsider. In its opinion, the court again emphasized the many factors that

contributed to the Debtors’ withdrawal liability. These factors included the actuarial assumptions
-11-

relied upon in calculating the amount of the liability. However, the court concluded that the 1974

Plan had failed, once again, to show that the withdrawal liability arose because of a direct and

substantial benefit to the estate. Accordingly, the bankruptcy court denied the Motion to Reconsider.

This timely appeal followed.

IV. DISCUSSION

The 1974 Plan appeals the bankruptcy court’s denial of its administrative expense claim on

several grounds. First, the 1974 Plan argues that, under established case law, the bankruptcy court

was required to allocate the withdrawal liability claim between prepetition and postpetition periods.

Because the Debtors’ employees continued to work for the Debtors during the pendency of the

chapter 11 cases and accrued pension credits during that time, the 1974 Plan asserts that the

postpetition portion of the withdrawal liability claim is entitled to priority as an administrative

expense under the Sixth Circuit’s “benefit to the estate” test. See Pension Benefit Guar. Corp. v.

Sunarhauserman, Inc. (In re Sunarhauserman, Inc.), 126 F.3d 811, 816 (6th Cir. 1997). The 1974

Plan further asserts that it was prejudiced by the bankruptcy court’s bifurcated analysis of its

withdrawal liability claim. That is, to the extent the bankruptcy court determined that the 1974 Plan

failed to demonstrate a direct link between the alleged benefit to the Debtors’ estate and the

postpetition withdrawal liability, the 1974 Plan argues that it should have been permitted to present

additional factual evidence regarding quantification of the postpetition portion of the claim and its

relationship to the work performed by the Debtors’ employees. Alternatively, the 1974 Plan alleges

that the postpetition portion of its withdrawal liability claim is entitled to administrative priority

under the Supreme Court’s decision in Reading Co. v. Brown, 391 U.S. 471, 88 S. Ct. 1759 (1968).

Specifically, the 1974 Plan characterizes its withdrawal liability claim as a statutory obligation that

was incidental to the operation of the Debtors’ businesses. Utilizing Reading, the 1974 Plan argues

that such claims are entitled to administrative priority, regardless of whether the Debtors’ estate

received any corresponding benefit.

This Panel will address each of the 1974 Plan’s arguments in turn. However, because a

general understanding of withdrawal liability is crucial to our analysis of the 1974 Plan’s purported
-12-

administrative claim, we begin our discussion with a brief recitation of the history of withdrawal

liability, how it is calculated, and when a claim may arise in a bankruptcy case.

A. Nature of Withdrawal Liability.

1. Historical Background and Purpose of Withdrawal Liability.

Before ERISA was amended by the Multiemployer Pension Plan Amendments Act of 1980,

29 U.S.C. §§ 1381-1453 (the “MPPAA”), employers who withdrew from underfunded pension

plans were “not necessarily required to pay [their] share of unfunded, vested benefits.” CPT

Holdings, Inc. v. Indus. & Allied Employees Union Pension Plan, Local 73, 162 F.3d 405, 407 (6th

Cir. 1998) (citing Milwaukee Brewery Workers’ Pension Plan v. Jos. Schlitz Brewing Co., 513 U.S.

414, 416-17, 115 S. Ct. 981 (1995)). As long as the plan did not become insolvent during the five

years following the employer’s withdrawal, the employer avoided all liability. CPT Holdings, Inc.,

162 F.3d at 407 (citing 29 U.S.C. § 1364). Unfortunately, under this system, “withdrawals of

contributing employers from a multiemployer pension plan frequently result[ed] in substantially

increased funding obligations for employers who continue[d] to contribute to the plan, adversely

affecting the plan, its participants and beneficiaries, and labor-management relations.” Bd. of

Trustees, Mich. United Food & Commercial Workers Unions v. Eberhard Foods, Inc., 831 F.2d

1258 (6th Cir. 1987) (quoting 29 U.S.C. § 1001a(a)(4)(A) (the preamble to the MPPAA)). This also

“encouraged an employer to withdraw from a financially shaky plan and risk paying its share if the

plan later became insolvent, rather than to remain and (if others withdrew) risk having to bear alone

the entire cost of keeping the shaky plan afloat.” Milwaukee Brewery, 513 U.S. at 416-17. As a

result, “a plan’s financial troubles could trigger a stampede for the doors, thereby ensuring the plan’s

demise.” Id. at 417; see also Pension Benefit Guar. Corp. v. R.A. Gray & Co., 467 U.S. 717, 720-25

& n.2, 104 S. Ct. 2709 (1984) (describing the circumstances that led to enactment of the MPPAA

and explaining how the five year look-back rule could actually encourage employer withdrawals in

some instances, thereby triggering a “vicious downward spiral” for the affected plan).

In an effort to address these problems – that is, to “provide a disincentive to withdrawals”

and to “mitigate their effect” – Congress enacted the MPPAA. Eberhard Foods, 831 F.2d at 1259.

The MPPAA “imposed a withdrawal charge on all employers withdrawing from an underfunded

plan” regardless of whether or not the plan later became insolvent. Milwaukee Brewery, 513 U.S.
 Three of the allocation methods set forth in the statute – the Presumptive, the Modified 11

Presumptive and the Rolling-5 – “base the determination [of the withdrawing employer’s share of

unfunded vested benefits] on the employer’s share of the plan’s contribution base over five-year

periods ending with the year before the employer’s withdrawal.” Jayne E. Zanglein & Susan J.

Stabile, ERISA Litigation 1238 (2d ed. 2005). The fourth method – Direct Attribution – “bases the

determination on the UVB attributable to the employer’s employees.” Id. at 1238-39.

 When an employer withdraws during a chapter 11 case, the 1974 Plan argues that a third 12

step is required to determine what portion of the employer’s total withdrawal liability should be

treated as an administrative expense. That is, the 1974 Plan asserts that the employer’s total

withdrawal liability must be allocated between the pre- and postpetition periods.

-13-

at 417; CPT Holdings, Inc., 162 F.3d at 407 (The MPPAA “require[s] ‘withdrawing employers to

pay their share of unfunded, vested benefits regardless of the plan’s future success.’”). 

2. Calculation of Withdrawal Liability.

Under ERISA as amended by the MPPAA, withdrawal liability represents an employer’s

obligation to pay its “proportionate share of the plan’s unfunded vested benefits” at the time of

withdrawal. CPT Holdings, Inc., 162 F.3d at 407 (citing 29 U.S.C. §§ 1381, 1391; Concrete Pipe

& Prods. v. Constr. Laborers Pension Trust, 508 U.S. 602, 608, 113 S. Ct. 2264 (1993)). The

determination of a withdrawing employer’s “fair share of a plan’s underfunding” is a two-step

process. See Milwaukee Brewery, 513 U.S. at 417. First, the amount of the plan’s “unfunded

vested benefits” must be calculated. Id. The MPPAA defines unfunded vested benefits as the

“difference between the present value of vested benefits . . . ‘and the current value of the plan’s

assets.’”CPT Holdings, Inc., 162 F.3d at 407 (quoting 29 U.S.C. §§ 1381, 1391) (additional citation

omitted). Second, the employer’s share of the unfunded vested benefits must be determined.

Milwaukee Brewery, 513 U.S. at 417. The statute sets forth four methods for making this

allocation. See 29 U.S.C. § 1391. These statutory methods generally base the allocation on “the 11

comparative number of [the] employer’s covered workers in each earlier year and the related level

of [the] employer’s contributions.” Milwaukee Brewery, 513 U.S. at 417. 12

Although the concept of withdrawal liability seems relatively straightforward, the

considerations, calculations, and assumptions involved in determining the amount of a withdrawing

employer’s liability are anything but simple. “The amount of a withdrawing employer’s liability is

initially assessed by the plan sponsor,” and if a dispute over the amount ofwithdrawal liability arises,
-14-

the plan’s actuarial assumptions and calculations are presumed correct unless they are proven to be

unreasonable in the aggregate or clearly erroneous. Masters, Mates & Pilots Pension Plan v. USX

Corp., 900 F.2d 727, 730 (4th Cir. 1990); see 29 U.S.C. § 1401(a)(3)(A), (B). The wide range of

reasonable assumptions that may be used by plan sponsors in making the withdrawal liability

calculation has caused the Sixth Circuit to remark that “the actual determination of withdrawal

liability is not an exact science.” Eberhard Foods, 831 F.2d at 1261 (discussing interest rate

assumptions and holding that the use of a six percent interest rate by the trustees of a multiemployer

plan in determining the employer’s withdrawal liability was not unreasonable) (citing Keith Fulton

& Sons v. New England Teamsters, 762 F.2d 1137, 1142-43 (1st Cir. 1985)); see also In re CD

Realty Partners, 205 B.R. 651, 658 & n.9 (Bankr. D. Mass. 1997) (noting that the existence and

amount of an underfunding, which will lead to withdrawal liability, is related to many factors,

several of which “cannot be known or quantified until the employer actually withdraws;” and “[e]ven

then, many can be quantified only by sophisticated guessing and estimating . . . .”) (emphasis added).

For instance, as the bankruptcy court correctly noted, the existence and amount of unfunded

vested benefits at the time of withdrawal from a plan is affected by many factors. As previously

stated, this calculation first requires a determination of the present value of vested benefits under the

plan. The “level of [a] plan’s liability for pension benefits . . . may vary over time as a result of

changes in contractual promises (such as a negotiated increase in benefit levels), in actuarial

assumptions (as to employee longevity, for example), and in other factors.” In re CD Realty

Partners, 205 B.R. at 658; see also Jayne E. Zanglein & Susan J. Stabile, ERISA Litigation 1237 (2d

ed. 2005) (explaining that the valuation of vested benefits under the plan may also require

consideration of demographic factors, such as the plan participants’ retirement ages and mortality

rates). The calculation of the “present value” of vested benefits also requires the plan’s actuary to

discount the future stream of benefit payments at an appropriate interest rate. Eberhard Foods, 831

F.2d at 1259; see also ERISA Litigation at 1237. “Increasing the interest rate assumption decreases

the employer’s withdrawal liability.” Eberhard Foods, 831 F.2d at 1260. Even “[a] small

adjustment in the interest rate assumption can lead to a major change in the withdrawal liability

calculation.” Id. 

The value of a plan’s assets may likewise be affected by several factors. Chief among these

factors are the amounts contributed by participating employers and the “level of return on the plan’s
 As explained by the United States Court of Appeals for the Fourth Circuit, a five-year 13

MMA approach values a plan’s assets:

by using the average value of those assets over the past five years, with each year’s

market value equally weighted in the computation. A five-year MMA is a

conservative approach to asset valuation, as it takes account of changes in asset value

at the rate of 20% per year; in other words, an increase or decrease in the [plan’s]

assets will only be fully incorporated into the valuation after five years. Thus, the

MMA approach moderates the impact of severe fluctuations in the stock market.

USX Corp., 900 F.2d at 731.

-15-

investment of those contributions.” In re CD Realty Partners, 205 B.R. at 658 (emphasis added).

The return on the plan’s investments is affected by the types of investments chosen by the plan’s

trustees and the performance of the financial markets. Valuation of the plan’s assets also involves

the use of various actuarial methods and assumptions. For example, assets may be valued at current

market value or under certain other accepted actuarial methods, such as a moving market average

(“MMA”). ERISA Litigation at 1237. In the Fourth Circuit case USX Corp., the pension plan’s 13

use of a five-year MMA to value its assets resulted in a withdrawal liability charge against the

employer that was seventy-five percent higher than would have been assessed if the plan had used

a current market value. USX Corp., 900 F.2d at 731. Although the Fourth Circuit Court of Appeals

concluded that the use of the MMA was not unreasonable and did not result in a “substantial

undervaluation” of the plan’s assets, the case illustrates how relatively small changes in actuarial

assumptions can lead to large disparities in asset valuation and, in turn, to large differences in the

amount of a plan’s unfunded vested benefits. Id. at 733.

As demonstrated by the foregoing examples, the amount of a pension plan’s unfunded vested

benefits may be greatly magnified by factors completely unrelated to the withdrawing employer or

its covered employees. The individual employer’s proportionate share of the unfunded vested

benefits is more closely linked to the employer’s past participation in the plan but, at least under the

Rolling-5 method, also depends on the hours worked by employees of other contributing employers.

Trustees of the Amalgamated Ins. Fund v. McFarlin’s, Inc., 789 F.2d 98, 103 (2d Cir. 1986) (an

employer’s proportionate share of a plan’s unfunded vested benefits is “extrapolate[d] . . . from such

factors as the employer’s past contributions to the plan and the portion of the plan’s unfunded benefit

obligations attributable to the employer’s employees) (citation omitted). 
 Although the bankruptcy court did not address Lexington Coal’s assertion that the Debtors’

14

withdrawal liability stemmed from their rejection of the collective bargaining agreements, and thus

should relate back to the date immediately preceding the filing of the chapter 11 case under § 365(g)

and § 502(g) , we note that the Sixth Circuit’s decision in CPT Holdings severely undercuts this

argument. Withdrawal liability does not derive from the collective bargaining agreements

themselves, but “is a product of the MPPAA.” CPT Holdings, Inc., 162 F.3d at 407; see

McFarlin’s, Inc., 789 F.2d at 104 n.2. As the Sixth Circuit explained in CPT Holdings, “there can

be no pre-withdrawal breach of ERISA giving rise to a ‘right to payment’ by a plan.” CPT Holdings,

Inc., 162 F.3d at 409. Accordingly, “a ‘claim’ cannot exist prior to withdrawal.” Id.

-16-

3. When Does the Withdrawal Liability Claim Arise?

In the bankruptcy context, a question is also presented as to when a claim for withdrawal

liability arises. The Sixth Circuit addressed this question in CPT Holdings, Inc., 162 F.3d 405. In

CPT Holdings, the debtor withdrew from its pension plan eighteen months after its chapter 11 plan

was confirmed. The issue was whether the pension plan had a “claim” for withdrawal liability as

of the date of confirmation, such that the claim was discharged. See 11 U.S.C. § 1141(d)(1)(A)

(unless the plan or confirmation order provides otherwise, confirmation “discharges a debtor from

any debt that arose before the date of such confirmation”). Answering this question in the negative,

the Sixth Circuit held that a “claim” for withdrawal liability “cannot exist prior to withdrawal.” Id.

at 409. The court explained that, in contrast to an employer’s failure to satisfy monthly or annual

funding requirements, which would give rise to an immediate right to payment by the plan,

“withdrawal liability is premised on an employer’s proportionate share of unfunded vested benefits

at the time of withdrawal.” CPT Holdings, Inc., 162 F.3d at 407 (emphasis in original) (citations

omitted); see also ERISA Litigation at 1210 (withdrawal liability is “an immediate and

noncontingent liability that the employer owes to the plan when it withdraws”). Accordingly, “[a]

multiemployer pension plan has no enforceable right to payment for withdrawal liability until an

employer actually withdraws from a plan, leaving the plan underfunded. Since this may never occur,

it cannot be said that a legal right to payment exists prior to withdrawal.” CPT Holdings, Inc., 162

F.3d at 409. In light of this binding authority, the bankruptcy court properly determined that the

withdrawal liability claim in this case did not arise until the Debtors withdrew from the 1974 Plan,

almost two years postpetition.14
-17-

B. The “Benefit to the Estate” Test.

As the bankruptcy court explained, the fact that the Debtors’ withdrawal liability arose

postpetition does not automatically mean that the liability, or any portion thereof, is an administrative

expense. See Trustees of the Amalgamated Ins. Fund v. McFarlin’s, Inc., 789 F.2d 98, 101 (2d Cir.

1986) (“A debt is not entitled to priority simply because the right to payment arises after the debtor

in possession has begun managing the estate.”). To be afforded administrative priority, the claim

must still meet the statutory definition and the test utilized by the Sixth Circuit. 

The Bankruptcy Code grants administrative priority status to claims for “the actual, necessary

costs and expenses of preserving the estate, including wages, salaries, or commissions for services

rendered after the commencement of the case[.]” 11 U.S.C. § 503(b)(1)(A); see 11 U.S.C.

§ 507(a)(1). The purpose of this provision “at least in the liquidation context, is to facilitate the

continued operation . . . of debtors-in-possession ‘by encouraging third parties to provide those

businesses with necessary goods and services’ that enable the maximization of value for creditors

of the estate upon liquidation.” Zurich Am. Ins. Co. v. Lexington Coal Co. (In re HNRC Dissolution

Co.), 371 B.R. 210, 224 (E.D. Ky. 2007), aff’d, 536 F.3d 683 (6th Cir. 2008) (quoting United

Trucking Serv., Inc. v. Trailer Rental Co. (In re United Trucking Serv., Inc.), 851 F.2d 159, 161 (6th

Cir. 1988)). Because “priority claims reduce the funds available for creditors and other claimants,”

it is well established that “[c]laims for administrative expenses under § 503(b) are strictly

construed.” City of White Plains, N.Y. v. A&S Galleria Real Estate, Inc. (In re Federated Dept.

Stores, Inc.), 270 F.3d 994, 1000 (6th Cir. 2001); see McFarlin’s, Inc., 789 F.2d at 101-02 (citations

omitted).

To determine whether a claim qualifies as an “actual and necessary” administrative expense,

the Sixth Circuit routinely applies the “benefit to the estate test.” See Pension Benefit Guar. Corp.

v. Sunarhauserman, Inc. (In re Sunarhauserman, Inc.), 126 F.3d 811, 816 (6th Cir. 1997). Under this

test, a debt qualifies as an administrative expense “only if (1) it arose from a transaction with the

bankruptcy estate and (2) directly and substantially benefitted the estate.” Id. (citing Employee

Transfer Corp. v. Grigsby (In re White Motor Corp.), 831 F.2d 106, 110 (6th Cir. 1987) (additional

citations omitted)). “The claimant has the burden of demonstrating entitlement to an administrative

expense priority by a preponderance of the evidence.” In re Liberty Fibers Corp., 383 B.R. 713, 717

(Bankr. E.D. Tenn. 2008).
-18-

For purposes of this appeal, the Panel will assume that the 1974 Plan’s administrative claim

arose from a transaction with the bankruptcy estate, thereby satisfying the first prong of the “benefit

to the estate” test. The 1974 Plan’s administrative claim arose during the postpetition period and

assertedly relates to postpetition hours worked by the Debtors’ employees. See In re

Sunarhauserman, 126 F.3d at 817 (“[I]t is an absolute requirement for administrative expense

priority that the liability at issue arise post-petition.”)

Accordingly, the central, and ultimately dispositive, issue in this appeal is whether the 1974

Plan has demonstrated that the asserted prorated postpetition portion of the Debtors’ withdrawal

liability directly and substantially benefitted the estate. Neither the Bankruptcy Code nor the Sixth

Circuit has defined the terms “direct” and “substantial,” so we must construe these terms in

accordance with their ordinary meanings. See The Limited, Inc. v. Comm’r, 286 F.3d 324, 332 (6th

Cir. 2002) (“When the text of a statute contains an undefined term, that term receives its ordinary

and natural meaning.”) (citation omitted).

The dictionary definition of “direct” suggests that the asserted benefit must be “free from

extraneous influence” and “immediate.” Black’s Law Dictionary (8th ed. 2004); Webster’s Third

New International Dictionary 640 (1986) (direct means “stemming immediately from a source;

having no compromising or impairing element; characterized by or giving evidence of a close . . .

causal . . . relationship; marked by absence of an intervening agency, instrumentality, or influence”);

cf., e.g., Office of Thrift Supervision v. Overland Park Fin. Corp. (In re Overland Park Fin. Corp.),

236 F.3d 1246, 1252 (10th Cir. 2001) (“When Congress does not define a word [in a statute], its

common and ordinary usage may be obtained by reference to a dictionary.”). To be considered

“substantial,” the benefit must also be “real,” “true,” “important” or “essential.” Webster’s Third

New International Dictionary 2280 (1986); see also In re Kmart Corp., 290 B.R. 614, 621 (Bankr.

N.D. Ill. 2003) (The administrative “claimant must demonstrate that the benefit is more than a

speculative or potential benefit.”).

 The 1974 Plan argues that the Debtors’ employees provided a benefit to the bankruptcy

estate by continuing to work after the filing of the Debtors’ chapter 11 case. The record establishes

that the Debtors operated for almost two years after filing their chapter 11 petitions. During this time

period, the Debtors’ UMWA employees worked a combined total of 2,976,962 hours. In addition
-19-

to wages, the compensation for these employees included the accrual of pension credit for the hours

worked during the postpetition period. According to the 1974 Plan, the work of these employees

facilitated the continued operation of the Debtors during the chapter 11 proceeding, preserved the

businesses’ going-concern value, and eventually led to the sale of the Debtors’ assets at a favorable

price.

This Panel agrees with the 1974 Plan’s assertion that the Debtors’ bankruptcy estate

benefitted from the postpetition work provided by its UMWA employees. We further agree that

debts with a direct relationship to the postpetition work of the Debtors’ employees may be entitled

to administrative status. See In re William B. Kessler, Inc., 23 B.R. 722, 726 (Bankr. S.D.N.Y.

1982), aff’d, 55 B.R. 735 (S.D.N.Y. 1985) (stating that employees who work postpetition are entitled

to receive full benefits flowing directly from their postpetition employment). For the reasons that

follow, however, we hold that the 1974 Plan failed to establish that its withdrawal liability claim

relates directly to the work performed by the Debtors’ employees postpetition. Therefore, the claim

is not entitled to priority as an administrative expense.

The consideration for the postpetition work of the Debtors’ employees, which unquestionably

benefitted the estate, included the payment of postpetition wages to these employees, as well as

accrual of other benefits, such as vacation pay. The Bankruptcy Code recognizes the importance of

this postpetition work by explicitly granting postpetition wages and other benefits attributable to

postpetition employment administrative priority, provided the employees’ services are necessary to

the preservation of the bankruptcy estate. 11 U.S.C. §503(b)(1)(A) (affording administrative priority

to “the actual, necessary costs and expenses of preserving the estate, including wages, salaries, and

commissions forservices rendered after the commencement of the case . . .”) (emphasis added); see

generally William L. Norton, Jr., Norton Bankruptcy Law and Practice 3d, § 49:20 (stating that

allowance of administrative claims for postpetition wages is fairly routine in chapter 11 cases where

the debtor’s business continues to operate postpetition and noting that most courts also allow

administrative claims for some types of vacation and severance pay). 

In addition to wages, the Sixth Circuit has held that the “normal” cost component of a

debtor’s postpetition minimum funding contributions to a defined benefit pension plan may be given

priority as administrative expenses under § 503(b)(1)(A), at least to the extent it relates to hours
-20-

actually worked by a debtor’s employees postpetition. In re Sunarhauserman, 126 F.3d at 816-17.

In Sunarhauserman, the Pension Benefit Guaranty Corporation (“PBGC”) filed an administrative

claim against the debtors for unpaid minimum funding contributions that accrued between the filing

of the debtors’ bankruptcy cases and the termination of the debtors’ pension plan. The PBGC’s

administrative claim included a “normal” cost component, which represented an actuarial calculation

of the cost of pension benefits based on projected employment of the debtors’ employees during the

plan year. The claim also included a “non-normal” cost component, which consisted almost entirely

of an actuarial allocation of experience losses attributable to prepetition liabilities. The bankruptcy

court allowed the “normal” cost component of PBGC’s administrative claim, but adjusted the

amount of the claim to account for workforce reductions and a freeze in benefit accruals that

occurred postpetition. The bankruptcy court concluded, however, that the “non-normal” cost

component of PBGC’s claim was not entitled to administrative priority. In re Sunarhauserman, Inc.,

184 B.R. 273, 278 (Bankr. N.D. Ohio 1995). On appeal, the district court affirmed the bankruptcy

court’s decision.

In Sunarhauserman, the Sixth Circuit affirmed the decisions of the bankruptcy and district

courts. Applying the “benefit to the estate” test, the court explained that “it is an absolute

requirement for administrative expense priority that the liability at issue arise post-petition.” In re

Sunarhauserman, 126 F.3d at 817. The court recognized that the liability for the entire amount of

PBGC’s claim arose under ERISA when the plan year ended during the administration of the

debtors’ bankruptcy cases. This did not, however, result in the entire claim being allowed as an

administrative expense. Rather, the court explained that “regardless ofthe 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, not when they accrued.” Id. at 818 (citing In re

Jartran, Inc., 732 F.2d 584 (7th Cir. 1984); Cramer v. Mammoth Mart, Inc. (In re Mammoth Mart,

Inc.), 536 F.2d 950 (1st Cir. 1976)). Because the “non-normal” cost component of the PBGC’s

claim related to prepetition liabilities, the Sixth Circuit concluded that it was not entitled to

administrative priority. The Sixth Circuit also reduced the “normal” cost component of PBGC’s

claim to account for workforce reductions and a freeze in benefit accruals that occurred postpetition.

The court acknowledged that, under ERISA, the debtors were bound to fully fund the plan after their

bankruptcy cases were filed, regardless of the changes in plan benefits that subsequently occurred
-21-

during the plan year. The court explained, however, that it was “appropriate to view as ‘actual and

necessary’ only that portion of the [d]ebtors’ post-petition funding obligation that [could] be tied to

employees’ actual post-petition services – i.e., hours actually work by employees post-filing.” Id.

at 820. Accordingly, the “normal” cost component of PBGC’s claim was entitled to administrative

priority, but only to the extent that it related to benefits actually earned postpetition. 

If postpetition minimum funding contributions to a pension plan may be given administrative

priority under the Sixth Circuit’s decision in Sunarhauserman, it seems appropriate to assert that

claims for withdrawal liability relating to postpetition work by a debtor’s employees should also be

entitled to priority status. After all, as explained by the bankruptcy court in In re Pulaski Highway

Express:

Employees as part of the collective bargaining process negotiate the terms and

conditions of their pension rights, and that obligation is enforceable by the union

members as either a contractual or statutory right. It is an integral part of the

compensation scheme agreed to by the debtor and its employees. See ERISA § 502,

29 U.S.C. § 1132(a)(3) and see also H.R. Rep. No. 869, 51, 53, reprinted in 1980

U.S. Code Cong. & Ad. News at 2921. The essence of withdrawal liability is to

ensure that employees receive the benefits which they have bargained for and earned.

See H.R. Rep. No. 869, 53 reprinted in 1980 U.S. Code Cong. & Ad. News at 2921.

In re Pulaski Highway Express, Inc., 57 B.R. 502, 508 n.11 (Bankr. M.D. Tenn. 1986). In light of

its conclusion that withdrawal liability is part of the compensation given to employees in

consideration for their postpetition efforts, the Pulaski court determined that the withdrawal liability

claim in that case should be prorated, with the postpetition portion of the claim being entitled to

treatment as an administrative expense. The court reasoned that, “[a]lthough withdrawal liability

may be triggered by a post-petition event,” the “‘right to payment’ is incurred when the employee

benefits become nonforfeitable.” Id. at 507. “Because the ‘claim’ for bankruptcy purposes arises

from the accrual of employees’ vested rights rather than the act of withdrawal, and because the

debtor did have a short period of post-petition operations,” the court concluded that a portion of the

pension plan’s claim could be “properly characterized as post-petition.” Id. 507-08. The Pulaski

court declined to determine, on the record before it, what portion of the claim was entitled to

administrative status. The court noted that ERISA provides four different methods for calculating

withdrawal liability, but acknowledged that none ofthose methods were “designed with the task here
-22-

in mind – the allocation of withdrawal liability across a point in time formed by a bankruptcy filing.”

Id. at 511 n.17.

Several other courts appear to agree with Pulaski’s conclusion that withdrawal liability

should be divided into pre- and postpetition components, and that the postpetition portion of the

claim may be afforded administrative priority. See, e.g., McFarlin’s, Inc., 789 F.2d at 103 (holding

that withdrawal liability claim was not entitled to administrative priority because the consideration

supporting the claim was the work of the debtor’s employees during the prepetition period); In re

Great Northeastern Lumber & Millwork Corp., 64 B.R. 426, 428 (Bankr. E.D. Pa. 1986) (concluding

that withdrawal liability claims are not entitled to administrative status unless they are “attributable

to wages earned after the filing of the petition”); In re Cott Corp., 47 B.R. 487, 495 (Bankr. D. Conn.

1984) (dividing withdrawal liability claim into pre- and postpetition components based upon the

period covered by the claim and affording the postpetition portion priority as an administrative

claim). The reasoning of these courts is similar to Pulaski’s analysis. As the United States Court

of Appeals for the Second Circuit has explained, withdrawal liability “is designed to insure that

before leaving a plan an employer would pay his ‘proportionate’ share of the plan’s liability for

vested but unfunded benefits attributable to work already performed. That liability usually

accumulates over a period of years prior to the departure of the withdrawing employer.” McFarlin’s,

Inc., 789 F.2d at 103 (internal citations omitted). Therefore, “[t]he consideration supporting the

withdrawal liability is . . . the same as that supporting the pensions themselves, the past labor of the

employees covered by the [p]lan.” Id. at 101-02 (citations omitted). According to the Second

Circuit, the withdrawal liability claim is treated as a general unsecured claim to the extent this past

labor occurred prepetition. Other courts have extended this premise to conclude that, to the extent

the labor occurred postpetition, the resulting claim might be entitled to administrative priority. See,

e.g., In re Cott Corp., 47 B.R. at 495. 

In this circuit, the reasoning of Pulaski and these other courts has been severely eroded by

CPT Holdings. In CPT Holdings the Sixth Circuit unequivocally held that a claim, or “right to

payment,” for withdrawal liability could not arise prior to a debtor’s actual withdrawal from its

pension plan. CPT Holdings, Inc., 162 F.3d at 409. Thus, Pulaski’s determination that a withdrawal

liability claim arises from the on-going accrual of employees’ vested rights rather than from the

withdrawal itself has been unquestionably constrained, if not negated, by Sixth Circuit case law. 
 The determination of the Debtors’ share of the total unfunded vested benefits is

15

problematic. Depending upon the method used, this determination might vary greatly.

-23-

In the present appeal, the 1974 Plan correctly asserts that the Debtors’ UMWA employees

worked during the postpetition period and earned pension credit as a result of that work. Under the

Rolling-5 method, these hours were included in the calculation of the Debtors’ total withdrawal

liability – that is, the determination of the Debtors’ share of the 1974 Plan’s unfunded vested benefits

at the time of withdrawal. After determining the Debtors’ share of the total unfunded vested 15

benefits, the 1974 Plan utilized another calculation to attempt to prorate the liability between the

prepetition and postpetition periods. We summarize the formula as follows: the first multiplier is

the postpetition hours worked by the Debtors’ covered employees divided by the total hours worked

by the covered employees both pre- and postpetition. This fraction is then multiplied by the statutory

withdrawal liability. The product is the prorated withdrawal liability that is asserted as an allowable

administrative expense.

The major issue, however, and the basis for our disagreement with Pulaski and other cases

that advocate proration of the withdrawal liability claim, is that the amount of withdrawal liability

to be assessed against a withdrawing employer, if any, is always dependent upon factors that are not

directly related to the postpetition work of a debtor’s employees. As discussed in detail above, the

first step in determining an employer’s withdrawal liability is to calculate the plan’s unfunded vested

benefits at the time of withdrawal. The existence of unfunded vested benefits at any point in time

is, in turn, driven by a myriad of factors including interest rate assumptions, the performance of a

plan’s investments, and other actuarial methods utilized by the plan’s sponsors. See In re CD Realty

Partners, 205 B.R. at 658 & n.9 (the existence and amount of an underfunding, which will lead to

withdrawal liability, is related to many factors which “can be quantified only by sophisticated

guessing and estimating . . . .”) (emphasis added). The influence of these outside factors and

investment market results on the withdrawal liability calculation are illustrated in this appeal. The

1974 Plan acknowledges that the actuarial funding deficit it experienced in the Plan Year ending

June 30, 2001, was the result of a “number of factors, including a significant dip in the stock market,

a lack of incoming contributions, and changes in pensions.” (Appellant’s Br. at 8.) Moreover, the

1974 Plan’s calculation of its total unfunded vested benefits at the end of the 2004 Plan Year was

reduced from approximately $2.1 billion to approximately $1.8 billion as the result of a change in
 On October 9, 2007, the Dow Jones Industrial Average (“DJIA”), a leading stock market

16

indicator, reached an all-time high at 14,164.53. One year and one day later, on October 10, 2008,

-24-

the 1974 Plan’s interest rate assumption. This revised interest rate assumption caused the Debtors’

total withdrawal liability to decrease from approximately $163 million at the time the original claim

was filed to approximately $138 million, which is the basis for the Amended Claim.

 The impact of these outside factors on the assessment of withdrawal liability is the essential

element that distinguishes withdrawal liability from other consideration for the postpetition work of

a debtor’s employees. As discussed above, wages have a direct causal link to an employees’

postpetition work and are generally allowed as administrative expenses. See 11 U.S.C.

§ 503(b)(1)(A). “Normal” contributions to a pension plan are also typically linked to the hours

worked by a debtor’s employees. Thus, these contributions may be allowed as administrative

expenses under the Sixth Circuit’s decision in Sunarhauserman. However, to emphasize its holding

that such contributions could only be afforded priority to the extent that they were linked to “hours

actually worked by employees post-filing,” the Sunarhauserman court reduced the administrative

claim in that case to account for workforce reductions and a freeze in benefit accruals that occurred

postpetition. In re Sunarhauserman, 126 F.3d at 820. 

Withdrawal liability claims do not have the same causal connection to the postpetition work

performed by a debtor’s employees as these other categories of expenses. This is because the

calculation of a plan’s unfunded vested benefits and consequently, the assessment of withdrawal

liability against a particular employer, will always be a function of numerous factors that are not, and

cannot be, directly linked to the postpetition work supplied by the Debtors’ employees. The most

significant factor may be the return on the investments of the pension funds. See In re CD Realty

Partners, 205 B.R. at 658.

Recent economic and stock market gyrations, mostly downward, support our analysis. The

investment performance of many retirement funds has been detrimentally affected. The withdrawal

liability imposed as a result of a plan terminated last week will be far greater than withdrawal

liability that may have arisen a year ago. The amount of the liability, along with any attempted

proration thereof, is significantly impacted by market forces. These forces undercut the assertion

that the prorated liability resulted from a “direct and substantial” benefit to the estate.16
the DJIA closed at 8,451.19. Markets Lineup, Wall St. J., Oct. 13, 2008, at C4. On the next day that

the markets opened, October 13, 2008, the DJIA surged upward by 936 points, the largest one-day

gain (approximately 11%) since the 1930s. Mark Landler, Stock Markets Rally Worldwide – Biggest

Intervention Since ‘30s, N.Y. Times, Oct. 14, 2008, at A1. The DJIA closed at 9,387.61. Id. at B1.

Even during the mid-point of the downward stock market decline, commentators recognized

the detrimental effect upon pension funds’ investments. Mary Williams Walsh, Market Turmoil

Leaves Big Pension Funds Falling Short, N.Y. Times, Apr. 17, 2008, at C3 (explaining that turmoil

in the financial markets results in adverse consequences from equity investments and interest rate

swings). The current crisis has adversely affected multi-employer pension plans for unionized

workers such as the 1974 Plan. Kris Maher, Unions Seek Pension Protections in Bailout, Wall St.

J., Sept. 25, 2008, at A6 (“Many of these pension funds assumed a 7% annual return on their

investments, but have lost money instead.” For example, the Teamster’s Central States Fund,

previously valued at $24 billion, lost $3 billion in assets during the first six months of 2008.); see

also Craig Karmin et al., Calpers May Lift Contribution Rate, Wall St. J., Oct. 23, 2008, at A3

(noting that that the assets of the California Public Employees’ Retirement System, commonly

known as Calpers, “have declined by more than 20%, or at least $48 billion, from the end of June

through Oct. 10”).

Given the above, one notes that investment losses will have a direct and substantial impact

on the potential withdrawal liability of any of the 1974 Plan’s contributing employers. Such impact

on withdrawal liability will be far greater than any potential loss (or gain) resulting solely from

employees’ continued work during a chapter 11 administrative period. Asimportant as employees’

work efforts may be, for administrative expense analysis, those efforts pale in comparison to the

vagaries of the market investment results.

-25-

Accordingly, we conclude, as a matter of law, that 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. In light of this conclusion, we need not consider the 1974

Plan’s assertion that it should be permitted to present additional factual evidence in support of its

calculation of its administrative claim. Indeed, based upon our review of the entire record, we

believe that the 1974 Plan was given an adequate opportunity to attempt to prove that its withdrawal

liability claim is entitled to administrative status. Regardless of how the employer’s proportionate

share of a plan’s unfunded vested benefits may be determined or how the withdrawal liability is

allocated between pre- and postpetition periods, the calculation will always be based upon factors

that are not directly related to the alleged benefit to the debtor’s estate. Consequently, the resulting

claim (and perhaps any claim) for withdrawal liability has only a tenuous connection to the

postpetition work ofthe Debtors’ employees and cannot be deemed to have directly and substantially

benefitted the estate. 
Reading was decided under § 64a(1) of the former Bankruptcy Act, the predecessor to

17

§ 503(b). However, because the two statutory sections are similar, courts have consistently applied

the reasoning of Reading to cases under the Bankruptcy Code. See, e.g., Ala. Surface Mining

Comm’n v. N.P. Mining Co. (In re N.P. Mining Co.), 963 F.2d 1449, 1455-56 (11th Cir. 1992). 

-26-

C. The Reading v. Brown Exception.

Finally, the 1974 Plan asserts that the “benefit to the estate” standard does not apply to its

claim because withdrawal liability is a statutorily-imposed obligation that was incidental to the

postpetition operation of the Debtors’ businesses. To support this assertion, the 1974 Plan relies

upon Reading Co. v. Brown, 391 U.S. 471, 88 S. Ct. 1759 (1968), for the principle that a claim may

be afforded administrative priority even if it does not benefit or help preserve a debtor’s estate, so

long as the claim relates to certain aspects of the estate’s postpetition operations. 

The debtor in Reading was under the protection of a bankruptcy receivership when its

17

primary asset, an eight-story industrial building, was totally destroyed by fire. The fire spread to

adjoining properties and damaged several neighboring businesses. Afterthe debtor was adjudicated

bankrupt and the receiver was appointed trustee, the owners of the adjoining properties filed more

than $3.5 million in claims against the debtor’s bankruptcy estate. The Reading Company, one of

the fire loss claimants, asserted that its claim was entitled to administrative priority because the fire

was caused by the negligence of the receiver in operating the debtor’s business. The trustee objected

to allowance of the claim as an administrative expense on the ground that payment of the fire loss

claim would confer no benefit on the debtor’s bankruptcy estate.

The Supreme Court held that the fire damage claim, which resulted from the postpetition

negligence of the receiver, was an “actual and necessary cost” of operating the debtor’s business,

even though payment of the claim provided no benefit to the bankruptcy estate. The Court explained

that “actual and necessary costs” should “include costs ordinarily incident to operation of a business,

and not be limited to costs without which rehabilitation would be impossible.” Reading, 391 U.S.

at 483. In reaching this conclusion, the Court cited “one important, and here decisive” objective of

the bankruptcy laws: “fairness to all persons having claims against an insolvent.” Id. at 477. The

Court noted that by postponing their claims during a Chapter XI arrangement, the debtor’s

prepetition unsecured creditors could hope to benefit from a successful rehabilitation of the debtor

and “eventually recover from the debtor either in full or in larger proportion than they would in
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immediate bankruptcy.” Id. at 478. The fire loss claimant, by contrast, “did not merely suffer injury

at the hands of an insolvent business: it had an insolvent business thrust upon it by operation of law.”

Id. The Court reasoned that:

in considering whether those injured by the operation of the business during an

arrangement should share equally with, or recover ahead of, those for whose benefit

the business is carried on, the latter seems more natural and just. Existing creditors

are, to be sure, in a dilemma not of their own making, but there is no obvious reason

why they should be allowed to attempt to escape that dilemma at the risk of imposing

it on others equally innocent. 

Id. at 482-83.

In applying Reading, courts have actively limited the use of the exception to claims for tort

damages, or cases involving intentional misconduct by the trustee or debtor-in-possession. Beneke

Co. v. Econ. Lodging Sys., Inc. (In re Econ. Lodging Sys., Inc.), 234 B.R. 691, 698 (B.A.P. 6th Cir.

1999); see also Abercrombie v. Hayden Corp. (In re Abercrombie), 139 F.3d 755, 758 (9th Cir.

1998) (“The Reading exception operates to deter the trustee from injuring third parties.”). For

example, in Charlesbank Laundry, the First Circuit granted administrative priority to a claim for

civil compensatory damages stemming from the debtor’s operation of its laundry facility in violation

of zoning laws and a temporary injunction. Spunt v. Charlesbank Laundry, Inc. (In re Charlesbank

Laundry, Inc.), 755 F.2d 200 (1st Cir. 1985). The First Circuit explained:

We see no reason why the claim of plaintiffs in this case does not fall within

both the letter and the spirit of Reading. The same fairness principle favors plaintiffs

here, whose premises, lives, or businesses were adversely affected by [the debtor’s]

continuing conduct in violation of the temporary injunction.

Id. at 202. In fact, the court suggested that the facts before it presented a potentially stronger case

for priority than those in Reading, because the debtor deliberately operated its business in violation

of the zoning laws and injunction. “If fairness dictates that a tort claim based on negligence should

be paid ahead of pre-reorganization claims, then . . . an intentional act which violates the law and

damages others should be so treated.” Id. at 203. Similarly, in Al Copeland Enterprises, the Fifth

Circuit granted administrative expense priority to an award of interest on sales taxes wrongfully and

deliberately withheld by a chapter 11 trustee. Al Copeland Enters., Inc. v. Tex. (In re Al Copeland
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Enters., Inc.), 991 F.2d 233, 238 (5th Cir. 1993). Finally, in a slight extension of the Reading

exception, the Eleventh Circuit in N.P. Mining allowed an administrative expense claim for punitive

civil penalties assessed as a result of postpetition environmental violations committed during the

operation of the chapter 11 debtor’s strip mining business. Ala. Surface Mining Comm’n v. N.P.

Mining Co. (In re N.P. Mining Co.), 963 F.2d 1449, 1455-56 (11th Cir. 1992) (acknowledging that,

unlike compensatory damages, the penalties would not be used to repair the environmental damage

or to protect the public’s health, but holding that under Reading and 28 U.S.C. § 959(b) penalties

assessed for postpetition mining operations are “costs ordinarily incident to the operation of a

business” and are entitled to administrative priority); but see Penn. Dept. of Envtl. Res. v. Tri-State

Clinical Labs., Inc., 178 F.3d 685 (3d. Cir. 1999) (punitive criminal fines for illegally disposing of

infectious waste postpetition are not entitled to administrative priority).

To our knowledge, the Sixth Circuit has granted administrative priority under the Reading

exception on only one occasion. See Lancaster v. Tenn. (In re Wall Tube & Metal Prods. Co.), 831

F.2d 118 (6th Cir. 1987). In Wall Tube, the Sixth Circuit determined that response costs incurred

by the State of Tennessee as a result of hazardous wastes stored at the debtor’s manufacturing site

were entitled to administrative priority. The court explained that prior Supreme Court decisions

“have created a special emphasis on the importance of complying with laws that protect the public

health and safety.” Id. at 123 (citing Midlantic Nat’l Bank v. N.J. Dept. of Envtl. Protection, 474

U.S. 494, 106 S. Ct. 755 (1986) and Ohio v. Kovacs, 469 U.S. 274, 105 S. Ct. 705 (1985)). In Wall

Tube, it was undisputed that the hazardous substances on the debtor’s property could have caused

as many as fifteen different health problems, ranging from loss of consciousness to death, to anyone

who came into contact with them. When the debtor, and later its trustee, did nothing to remedy these

health hazards, the State of Tennessee was entitled under its own state laws and CERCLA to

“expend funds to assess the gravity of the environmental hazard.” Id. at 124. Although these

expenses produced no corresponding benefit to the estate, the court held that the expenses were

“actual and necessary, both to preserve the estate in required compliance with state law and to protect

the health and safety of a potentially endangered public.” Id. 

At least one judge on the Sixth Circuit has suggested that the reasoning in Wall Tube should

be applied beyond the context of environmental cases. See Pension Benefit Guar. Corp. v.

Sunarhauserman, Inc. (In re Sunarhauserman, Inc.), 126 F.3d 811, 821 (6th Cir. 1997) (Kennedy,
The majority’s holding in Sunarhauserman appears to be in line with a number of cases 18

declining to apply the Reading exception to claims stemming from prepetition contracts. See, e.g,

In re Weinschneider, 395 F.3d 401 (7th Cir. 2005) (declining to extend the Reading exception to an

attorney’s claim for breach of a covenant not to sue); Total Minatome Corp. v. Jack/Wade Drilling,

Inc. (In re Jack/Wade Drilling, Inc.), 258 F.3d 385 (5th Cir. 2001) (declining to extend exception

to non-debtor litigant’s claim for attorney fees, costs and expenses awarded to it as prevailing party

in chapter 7 trustee’s postpetition suit for breach of prepetition contract); In re Abercrombie, 139

F.3d 755 (denying administrative priority to claim for attorney fees awarded postpetition against

chapter 11 debtor in real estate contract action initiated prepetition).

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J., dissenting). The dissenting judge opined that both the “normal” and “non-normal” components

of a debtor’s postpetition minimum funding contributions under ERISA should be entitled to

administrative priority. Judge Kennedy reasoned that, like environmental response costs under

CERCLA, the “costs of complying with a regulatory scheme [in this case, ERISA] are administrative

expenses, regardless of whether they ‘benefit the estate’ in a practical way.” Id. at 821. Judge

Kennedy noted that “[a]lthough protection of the environment is an important goal, so is protection

of pension funds.” Id. at 822. Accordingly, she concluded that “[i]f compliance with a given statute

or regulation is necessary to operate as a business, then the costs of such compliance necessarily

should be an administrative expense.” Id. 

 The Sunarhauserman majority did not directly address Wall Tube or Judge Kennedy’s

comparison of ERISA minimum funding contributions to response costs under CERCLA. Instead,

the court generally found the Reading exception inapplicable based on the fact that the non-normal

component of PBGC’s claim related to liabilities that arose prepetition. Id. at 817. The majority

explained that “Reading does not eliminate the requirement that a debt arise post-petition in order

to be accorded administrative expense priority.” Id. Because the non-normal portion of PBGC’s

claim related to prepetition liabilities, the majority held that Reading “would not justify granting

administrative priority to the entirety of Pension Benefit’s claim.” Id. 

18

In the present appeal, there is no question that the 1974 Plan’s withdrawal liability claim

arose postpetition and partially relates to postpetition work by the Debtor’s employees. See CPT

Holdings, Inc. v. Indus. & Allied Employees Union Pension Plan, Local 73, 162 F.3d 405, 409 (6th

Cir. 1998). Accordingly, the grounds on which the Sunarhauserman majority declined to apply

Reading are not relevant in this instance. Nevertheless, we find that the 1974 Plan’s withdrawal

liability claim is not the type of claim to which the narrow Reading exception applies. Unlike other
 In the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Congress 19

demonstrated its ability to give statutory liabilities administrative status. See 11 U.S.C. § 503(b)(9)

(granting administrative priority to a particular category of reclamation claims).

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cases that have applied the exception, the withdrawal liability claim does not stem from tortious or

deliberate misconduct by the Debtors. As discussed previously, withdrawal from multiemployer

pension plans is permitted, and even anticipated, under ERISA. The assessment of withdrawal

liability against an employer seeks to discourage withdrawals from multiemployer pension plans and,

when they occur, to mitigate the negative impact of the withdrawal on employees and other

participating employers. Withdrawal liability is not a penalty for wrongful conduct. The Debtors

were within their rights when they terminated operations and withdrew from the 1974 Plan.

Therefore, we find that the resulting withdrawal liability is not entitled to administrative priority

under Reading and its progeny. 

We likewise decline to extend the Reading exception to the 1974 Plan’s claim on the basis

that, like the environmental claims in Wall Tube, compliance with ERISA, including payment of

withdrawal liability, is a cost of operating the debtor’s business that should be treated as an

administrative expense. Although protection of pension funds is an unquestionably important goal,

we do not believe that the special concern for the public health and safety present in Wall Tube and

the other environmental cases is implicated in the present appeal. See, e.g., In re Sunarhauserman,

184 B.R. 273, 276-77 (Bankr. N.D. Ohio 1995), aff’d, 126 F.3d 881 (6th Cir. 1997) (distinguishing

minimum funding requirement under ERISA from environmental regulations designed to protect the

public health and safety). Any extension of the Reading exception to statutory withdrawal liability

is best undertaken by the United States Court of Appeals for the Sixth Circuit, the Supreme Court,

or Congress.19

V. CONCLUSION

For the foregoing reasons, we conclude that the 1974 Plan failed to establish, as a matter of

law, that its withdrawal liability claim “directly and substantially” benefitted the Debtors’ estates.

Further, because the withdrawal liability claim does not stem from tort damages or intentional

misconduct on the part of the Debtors, the Reading exception does not apply and the claim is not
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entitled to administrative priority on that basis. Accordingly, the bankruptcy court’s disallowance

of the 1974 Plan’s claim is AFFIRMED.