Bayly Corp., In re, 97-1149

• Decision Date: 22 December 1998
• Docket Number: No. 97-1149,97-1149
• Citation: 163 F.3d 1205
• Parties: , Bankr. L. Rep. P 77,873, 22 Employee Benefits Cas. 2137, Pens. Plan Guide (CCH) P 23,950J, 1999 CJ C.A.R. 261, 1999 CJ C.A.R. 56, 16 Colo. Bankr. Ct. Rep. 1 In re BAYLY CORPORATION, Tax ID 84-0014030, Debtor. Pension Benefit Guaranty Corporation, Appellant, v. Cynthia Skeen, Trustee, Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1205

163 F.3d 1205

33 Bankr.Ct.Dec. 834, Bankr. L. Rep. P 77,873,

22 Employee Benefits Cas. 2137,

Pens. Plan Guide (CCH) P 23,950J,

1999 CJ C.A.R. 261, 1999 CJ C.A.R. 56,

16 Colo. Bankr. Ct. Rep. 1

In re BAYLY CORPORATION, Tax ID 84-0014030, Debtor.

Pension Benefit Guaranty Corporation, Appellant, v. Cynthia Skeen, Trustee, Appellee.

No. 97-1149.

United States Court of Appeals, Tenth Circuit.

Dec. 22, 1998.

Susan E. Birenbaum, Assistant General Counsel, Pension Benefit Guaranty Corporation (Garth D. Wilson and Thomas T. Kim, Attorneys, Pension Benefit Guaranty Corporation, James J. Keightley, General Counsel, Jeffrey B. Cohen, Deputy General Counsel, and Israel Goldowitz, Assistant General Counsel, Pension Benefit Guaranty Corporation, with her on the briefs), Washington, D.C., for appellant.

Christopher E. Bench, Bench & Associates, Denver, Colorado, for appellee.

Before ANDERSON, EBEL and HENRY, Circuit Judges.

EBEL, Circuit Judge.

After appellant Pension Benefit Guarantee Corporation ("PBGC") assumed control of the underfunded pension plan of the Bayly Corporation ("Debtor"), a bankrupt company, PBGC filed a proof of claim in bankruptcy court for the amount of the underfunding pursuant to 29 U.S.C. § 1362(b). PBGC sought priority for its claim under the Bankruptcy Code as an administrative expense. The bankruptcy court denied PBGC administrative expense priority and the district court affirmed the bankruptcy court. We affirm. Even though payment for the amount of underfunding did not become due and owing until the post-petition termination of the plan, PBGC's claim for unfunded benefit liabilities, predicated solely on benefits accrued by Debtor's employees as a result of pre-petition labor, represented a pre-petition claim contingent upon plan termination. Consequently, the liability was not incurred by the bankruptcy estate and did not qualify as an administrative expense under 11 U.S.C. § 503(b)(1)(B).

BACKGROUND

On December 14, 1990, Debtor filed for bankruptcy in the District of Colorado under Chapter 11 of the Bankruptcy Code. ¹ Because Debtor failed to reorganize, the bankruptcy court converted Debtor's case to a Chapter 7 liquidation on November 29, 1992. Appellee Cynthia Skeen was appointed successor Trustee on January 29, 1993.

Debtor had established the Defined Benefit Retirement Plan of Bayly Corporation (the "Plan") for its unionized employees in four western states, including Colorado. Employees covered by the Plan provided no services to Debtor after the bankruptcy case was filed. Under the Employee Retirement Income Security Act of 1974 ("ERISA"), sponsors of single-employer pension plans must make periodic contributions to their plans. See 26 U.S.C. § 412 and 29 U.S.C. § 1082. Plan sponsors also must pay premiums under the mandatory pension plan termination insurance program established under Title IV of ERISA. See 29 U.S.C. §§ 1301-1461; see generally PBGC V. LTV Corp., 496 U.S. 633, 636-39, 110 S.Ct. 2668, 110 L.Ed.2d 579 (1990). Debtor qualified as a plan sponsor under ERISA.

PBGC, a wholly-owned United States government corporation, administers the pension plan termination insurance program. See 29 U.S.C. §§ 1301-1461. Under ERISA, PBGC becomes the statutory trustee of any plan terminated without sufficient funds to pay guaranteed benefits. See 29 U.S.C. §§ 1322, 1342, 1361. Upon termination of an underfunded plan, the plan sponsor incurs liability to PBGC for a mandatory termination payment to reimburse PBGC for the benefits PBGC must pay to the plan's beneficiaries. See 29 U.S.C. § 1362. In such circumstances, PBGC has a claim against the plan sponsor for the total amount of the unfunded guaranteed benefits of the plan, subject to a limitation of thirty percent of the net worth of the employer. See 29 U.S.C. §§ 1342(d)(1)(B)(ii), 1362(b). If a liable employer fails to pay the amount of its liability under § 1362(b) after demand is made by PBGC, PBGC can establish a lien on all property of the liable party. See 29 U.S.C. § 1368(a). Such lien is to be treated in the same manner as a tax due and owing the United States under the Bankruptcy Code. See 29 U.S.C. § 1368(c)(2).

After Debtor filed for bankruptcy, PBGC and the Trustee executed an agreement terminating the Plan and appointing PBGC as the Plan's statutory trustee pursuant to 29 U.S.C. §§ 1342(a) and 1348(a)(3). The agreement established September 1, 1991 as the Plan's Termination Date. As of the Termination Date, the Plan had unfunded benefit liabilities of $1,097,800 and Debtor had a net worth of $1,175,789.37, and thirty percent of Debtor's net worth is $352,736.81.

PBGC then filed a proof of claim with the bankruptcy court for unfunded benefit liabilities under 29 U.S.C. § 1362(b) in the amount of $352,736.81, seeking administrative expense priority for its claim as a post-petition tax under 11 U.S.C. § 503(b)(1)(B)(I). The $352,736.81 figure represented 30 percent of Debtor's net worth, the largest amount PBGC could have asserted as a lien under 29 U.S.C. § 1368. However, because PBGC did not demand payment for the unfunded guaranteed benefit liabilities pre-petition and because an automatic stay had been issued by the bankruptcy court preventing any liens from ripening against Debtor post-petition, PBGC failed to create a lien against Debtor under 29 U.S.C. § 1368. ² The Trustee objected to PBGC's claim, and the bankruptcy court held that PBGC was not entitled to administrative expense priority under the Bankruptcy Code. The district court affirmed. PBGC now appeals, arguing only that its $352,736.81 claim constitutes a post-petition tax under 11 U.S.C. § 503(b)(1)(B)(I) entitled to administrative expense priority.

DISCUSSION

Section 507(a)(1) of the Bankruptcy Code grants first priority to certain administrative expenses listed in § 503, including "any tax-(I) incurred by the estate, except a tax of a kind specified in section 507(a)(8) of this title." ³ 11 U.S.C. § 507(a)(1); see also 11 U.S.C. § 503(b)(1)(B). In order to qualify for administrative expense priority as a tax under 11 U.S.C. § 503(b)(1)(B)(I), PBGC's claim both must constitute a tax and must have been incurred by the estate post-petition. See In re Sunnyside Coal Co., 146 F.3d 1273, 1278 (10th Cir.1998) ("Only taxes 'incurred by the estate' are administrative expenses.... However, until the petition is filed, there can be no estate; hence 'first priority for tax claims extends only to post-petition taxes.' ") (citing 4 Collier on Bankruptcy, p 503.07 (15th ed. rev.1998)). In denying administrative expense priority, the bankruptcy court found that PBGC's claim for $352,736.81 failed to meet either of these two requirements. We review de novo the district court's conclusions of law. See State Bank v. Gledhill (In re Gledhill), 76 F.3d 1070, 1077 (10th Cir.1996). We need not decide whether PBGC's claim for unfunded benefit liabilities can properly be characterized as a tax claim because, in any event, we agree that PBGC's claim was not incurred by the estate post-petition. ⁴

We narrowly construe the priorities allowed under § 503(b) because "the presumption in bankruptcy cases is that the debtor's limited resources will be equally distributed among his creditors." Isaac v. Temex Energy, Inc. (In re Amarex, Inc.), 853 F.2d 1526, 1530 (10th Cir.1988) (quoting Trustees of Amalgamated Ins. Fund v. McFarlin's, Inc., 789 F.2d 98, 100 (2d Cir.1986)). A claim is not entitled to priority under § 503 "simply because the right to payment arises after the debtor in possession has begun managing the estate." In re Amarex, Inc., 853 F.2d at 1530. If a debtor becomes liable to a claimant before the bankruptcy petition is filed, but the liability is contingent on the occurrence of some future event, the claim to recover that debt is treated as a pre-petition claim even if the condition does not occur and the right to payment does not arise until after the bankruptcy petition is filed. Cf. id. (inquiry must focus on what consideration supports the claim and whether it or any portion of it was pre-petition).

For example, a claim by a guarantor against a debtor to recover post-petition payments made by the guarantor on behalf of the debtor under the terms of a pre-petition guarantee agreement is treated as a pre-petition claim under 11 U.S.C. § 502(e)(2), which deals with the allowance and disallowance of contingent claims. See 4 Collier on Bankruptcy, p 502.06. The claim's pre-petition status remains undisturbed even if the guarantor pays the creditor post-petition:

Such claims have the same priority as the underlying creditor's claim, and are not elevated in priority merely because the underlying creditor's claim was extinguished postpetition. To give a surety better than prepetition status because it made payment to a prepetition creditor after the filing of a bankruptcy petition would distort the scheme of the Bankruptcy Code with respect to prepetition claims and postpetition administrative expense claims.

Id. p 502.06[a].

Courts have employed the same rationale in addressing the status of claims against employers for amounts due as a termination payment upon withdrawal from a multiemployer pension plan. Under the Multiemployer Pension Plan Amendments Act ("MPPAA"), 29 U.S.C. §§ 1381 et seq., an employer who participates in a multiemployer pension and employee benefit plan must make periodic funding payments to the plan to cover the cost of benefits for that employer's employees. If the employer subsequently withdraws from the multiemployer plan, the employer incurs a withdrawal liability. See 29 U.S.C. § 1381. The employer becomes obligated to make a lump sum payment of additional money to the plan upon withdrawal in order to satisfy the employers' proportionate share of the vested but unfunded benefits to be paid to employees participating in the plan. See Susan Block-Lieb, Priority Claims, Including Administrative Expense Claims, 546 PLI/Comm...