Bankruptcy Does Not Discharge Withdrawal Liability When The Employer’s Pension Plan Withdrawal Comes After The Bankruptcy, New Jersey District Court Holds

Courts have debated whether an employer’s Chapter 11 bankruptcy can discharge pension plan withdrawal liability when the employer’s withdrawal from the plan occurs after the bankruptcy.  A sensible July 2014 decision by the federal district court for the District of New Jersey held that no, a bankruptcy that precedes the employer’s withdrawal does not discharge any portion of the withdrawal liability.  See Einhorn v. Dubin Bros., Civil Action No. 12-6814 (D.N.J. July 16, 2014).

In that case, a lumber company that was obligated to make contributions to a Philadelphia-based Teamster pension plan filed Chapter 11 bankruptcy in 2002.  In 2004, it received a discharge of its debts.  After emerging from bankruptcy, the company continued to operate and contribute to the pension plan, until it withdrew from the plan in 2011.

The pension plan then sued the company for withdrawal liability under the Multiemployer Pension Plan Amendments to ERISA, which make an employer liable for its share of a multiemployer pension plan’s unfunded vested benefits.  The suit sought withdrawal liability for unfunded pension benefits for the period 1979 to 2010.

The company argued that the 2004 discharge it received from its Chapter 11 bankruptcy eliminated that portion of the withdrawal liability that predated the discharge.

The court disagreed.  Judge Simandle reasoned that the earlier bankruptcy could not have discharged any portion of the withdrawal liability because the withdrawal liability only came into existence with the company’s 2011 withdrawal from the plan.  Since there was no claim for withdrawal liability in the earlier bankruptcy, no such claim could have been discharged.

The court acknowledged the split in the case law on this issue.  For example, in In re CD Realty Partners, 205 B.R. 651 (Bankr. D. Mass. 1997), the bankruptcy court in Massachusetts held that an employer’s bankruptcy that preceded the employer’s withdrawal from a pension plan nonetheless discharged the employer’s withdrawal liability.  The court there reasoned that although the employer’s withdrawal from the plan triggered the liability, a contingent claim for withdrawal liability existed at the time of the bankruptcy and that such contingent claim was sufficiently certain to be discharged in the bankruptcy.  The court in CD Realty Partners explained that by simply participating in a pension plan, an employer becomes responsible for its share of the plan’s unfunded liability, and that the employer’s withdrawal from the plan some day is almost inevitable.

CD Realty Partners is a thoughtful, philosophically interesting decision, but the New Jersey district court in Einhorn took the proper approach.  A participating employer may never become liable for withdrawal liability:  the plan may never be underfunded, or the employer may never withdraw.  A prior bankruptcy should not be held to discharge a withdrawal liability claim that at the time does not exist and that may well never exist.

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