ERISA Violation Can Be Grounds for Dismissal of Employer’s Bankruptcy Case, New York Bankruptcy Court Holds

By Peter D. DeChiara

pdechiara@cwsny.com

April 2020

An employer’s violation of ERISA, the federal statute governing pension plans, can be grounds for dismissing the employer’s Chapter 11 bankrupt case, according to a recent decision by the U.S. bankruptcy court for the Eastern District of New York.  In particular, the court held, an employer’s engaging in a transaction to evade or avoid pension plan withdrawal liability can be a basis for finding that the employer filed the bankruptcy in bad faith.  See In re G.A.F. Seelig, Inc., Case No. 17-46968 (Bankr. E.D.N.Y, March 19, 2020)

In G.A.F. Seelig, the employer was a family-owned dairy that participated in a multi-employer Teamster pension plan.  After the company withdrew from the plan, the plan asserted a withdrawal liability claim against it, seeking to hold the company liable for its share of the plan’s unfunded liabilities.  After the employer filed for Chapter 11 bankruptcy, the plan moved to dismiss the case.  Its motion rested on Section 4212 of ERISA, which provides that “[i]f a principal purpose of any transaction is to evade or avoid [withdrawal] liability,” then the liability “shall be determined and collected … without regard to such transaction.”  29 U.S.C. §1392(c).  The plan contended that the company had engaged in one or more transactions to evade or avoid withdrawal liability.

In ruling on the plan’s motion, bankruptcy judge Elizabeth Strong explained that a court has cause to dismiss a bankruptcy case that was filed in bad faith.  Moreover, she held, bad faith “may be established by an ERISA violation.”  She concluded that if the pension plan could establish that the employer had violated ERISA Section 4212, cause would exist to dismiss the case.  Such a dismissal would have left the company without the discharge of its liabilities that bankruptcy provides.

Fortunately for the company, the judge rejected the plan’s contention that it had engaged in a transaction to evade or avoid withdrawal liability.  For example, the plan pointed to a proposed sale of the dairy as a transaction by the company aimed at avoiding its withdrawal liability.  But the judge found that since the sale never took place, it could not have been a transaction within the meaning of ERISA.

Judge Strong also rejected the plan’s argument that the employer’s proposed plan of reorganization constituted a transaction to evade withdrawal liability.  She acknowledged that a Chapter 11 plan can be a transaction that violates ERISA Section 4212.  But here, she explained, there was no such transaction since the company had not yet even filed a proposed reorganization plan.

The court in Seelig did not hold that the only type of ERISA violation that could justify dismissal of a bankruptcy case would be violation of the evade-or-avoid language in ERISA Section 4212.  Indeed, Judge Strong wrote simply that bad faith “may be established by an ERISA violation,” (emphasis added), suggesting that other types of ERISA violations could support a bad faith finding.  That may be something to consider the next time a pension plan moves to dismiss an employer’s bankruptcy.