Opinion ID: 2977150
Heading Depth: 3
Heading Rank: 2

Heading: The “Benefit to the Estate” Test.

Text: 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). -17- 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 -18- 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 for services 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 -19- 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 of the substantive law on which the claim is based, the proper standard for determining that claim’s administrative priority looks to when the acts giving rise to a liability took place, 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 -20- 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 of those methods were “designed with the task here -21- 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. -22- 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.15 After determining the Debtors’ share of the total unfunded vested 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 15 The determination of the Debtors’ share of the total unfunded vested benefits is problematic. Depending upon the method used, this determination might vary greatly. -23- 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 16 On October 9, 2007, the Dow Jones Industrial Average (“DJIA”), a leading stock market indicator, reached an all-time high at 14,164.53. One year and one day later, on October 10, 2008, -24- 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 of the Debtors’ employees and cannot be deemed to have directly and substantially benefitted the estate. 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. As important as employees’ work efforts may be, for administrative expense analysis, those efforts pale in comparison to the vagaries of the market investment results. -25-