Post-Petition Portion of Withdrawal Liability Constitutes Administrative Expense, Says California Bankruptcy Court

By Sommer Omar

An employer that withdraws from an underfunded multiemployer pension plan owes the plan withdrawal liability.  When the employer has petitioned for Chapter 11 protection, some portion of its withdrawal liability may arise pre-petition and some portion may arise post-petition.  Does the post-petition portion give the pension plan an administrative claim against the employer, entitling the plan to payment of that portion before the employer’s payout on any general unsecured claims?  Federal appeals courts have split over that question, with the Sixth Circuit saying no and the Third Circuit saying yes.  The bankruptcy court for the Northern District of California recently weighed in, ruling in favor of granting administrative expense status to post-petition withdrawal liability.  See In re California-Nevada Methodist Homes, No. 21-40363 CN (Bankr. N.D. Cal. April 11, 2023).

In that case, the employer, California-Nevada Methodist Homes, operated continuing care retirement facilities.  The employer contributed to the SEIU National Industry Pension Fund on behalf of its SEIU-represented employees. 

After filing for Chapter 11 protection, California-Nevada continued contributing to the Fund.  However, after nearly two years in bankruptcy, it sold its facilities and terminated almost all of its employees, triggering withdrawal liability.  Under the Multiemployer Pension Plan Amendments Act of 1980, employers that cease participating in a multiemployer pension plan are liable for their share of the plan’s unfunded vested benefits.  See 29 U.S.C. § 1381. 

The Fund argued in the bankruptcy court that the portion of California-Nevada’s withdrawal liability arising post-petition constituted an administrative expense. The Bankruptcy Code’s definition of administrative expenses includes compensation for services rendered by employees post-petition.  See 11 U.S.C. §503(b)(1)(A).  Courts in the Ninth Circuit (which includes California) have held that, for the payment of such compensation to qualify as an administrative expense, it must also “directly and substantially” benefit the bankruptcy estate.

The issue before Bankruptcy Judge Charles Novak was whether California-Nevada directly and substantially benefitted when it incurred the post-petition portion of the withdrawal liability.  Relying on Sixth Circuit precedent, see UMW 1974 Plan & Trust v. Lexington Coal Co., LLC, 396 B.R. 461 (6th Cir. B.A.P. 2008), the company argued that the post-petition withdrawal liability it incurred was entirely unrelated to the benefit it received from its employees’ post-petition work.  It noted that the calculation of the amount of the withdrawal liability corresponding to the post-petition work turned on facts unrelated to that work, such as actuarial assumptions about the pension funds’ retirees, assumptions about the fund’s investment results, and assumptions about the rate of contributions from participating employers.

Relying on precedent from the Third Circuit, see In re Marcal Paper Mills, Inc., 650 F.3d 311 (3d Cir. 2011), the Fund argued that the post-petition tranche of the withdrawal liability constituted an administrative expense because the employer paid it in exchange for its employees’ post-petition work.  Judge Novack agreed, reasoning that the employer had promised to provide its employees with pension benefits as part of their compensation package, and that the possibility of the employer having to pay withdrawal liability constituted part of that promise.  “While Cal-Nevada’s withdrawal liability may be a function of several non-employment related factors,” Judge Novack wrote, “its payment ensures that the Pension Fund will have sufficient funds to keep Cal-Nevada’s defined benefit promise to the Employees.”

The judge got it right by following the Third Circuit’s approach, holding that post-petition withdrawal liability is “part of the bargained-for” cost of the employees’ post-petition services to the debtor, and thus constitutes an administrative expense.

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