Opinion ID: 2977150
Heading Depth: 3
Heading Rank: 1

Heading: Nature of Withdrawal Liability.

Text: 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. -12- 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.11 See 29 U.S.C. § 1391. These statutory methods generally base the allocation on “the comparative number of [the] employer’s covered workers in each earlier year and the related level of [the] employer’s contributions.”12 Milwaukee Brewery, 513 U.S. at 417. 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 of withdrawal liability arises, 11 Three of the allocation methods set forth in the statute – the Presumptive, the Modified 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. 12 When an employer withdraws during a chapter 11 case, the 1974 Plan argues that a third 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- 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 -14- 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”).13 ERISA Litigation at 1237. In the Fourth Circuit case USX Corp., the pension plan’s 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). 13 As explained by the United States Court of Appeals for the Fourth Circuit, a five-year 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- 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 14 Although the bankruptcy court did not address Lexington Coal’s assertion that the Debtors’ 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-