Richardson v. Checker Acquisition Corp. (In re Checker Motors Corp.)

• Decision Date: 10 June 2013
• Docket Number: Adversary Nos. 11–80018,11–80015,Bankruptcy No. HK 09–00358.,11–80019,11–80016.
• Citation: 495 B.R. 355
• Parties: In the Matter of CHECKER MOTORS CORPORATION, a Delaware corporation, Debtor. Thomas C. Richardson, Liquidating Trustee of Checker Motors Corporation, as successor in interest to the Official Committee of Unsecured Creditors of Checker Motors Corporation, Plaintiff, v. Checker Acquisition Corporation, Defendant. Thomas C. Richardson, Liquidating Trustee of Checker Motors Corporation, as successor in interest to the Official Committee of Unsecured Creditors of Checker Motors Corporation, Plaintiff, v. Allan R. Tessler, Defendant. Thomas C. Richardson, Liquidating Trustee of Checker Motors Corporation, as successor in interest to the Official Committee of Unsecured Creditors of Checker Motors Corporation, Plaintiff, v. Christopher Markin, Defendant. Thomas C. Richardson, Liquidating Trustee of Checker Motors Corporation, as successor in interest to the Official Committee of Unsecured Creditors of Checker Motors Corporation, Plaintiff, v. David Markin, Defendant.
• Court: U.S. Bankruptcy Court — Western District of Michigan

495 B.R. 355

In the Matter of CHECKER MOTORS CORPORATION, a Delaware corporation, Debtor.

Thomas C. Richardson, Liquidating Trustee of Checker Motors Corporation, as successor in interest to the Official Committee of Unsecured Creditors of Checker Motors Corporation, Plaintiff,

v.Checker Acquisition Corporation, Defendant.

Thomas C. Richardson, Liquidating Trustee of Checker Motors Corporation, as successor in interest to the Official Committee of Unsecured Creditors of Checker Motors Corporation, Plaintiff,

v.Allan R. Tessler, Defendant.

Thomas C. Richardson, Liquidating Trustee of Checker Motors Corporation, as successor in interest to the Official Committee of Unsecured Creditors of Checker Motors Corporation, Plaintiff,

v.Christopher Markin, Defendant.

Thomas C. Richardson, Liquidating Trustee of Checker Motors Corporation, as successor in interest to the Official Committee of Unsecured Creditors of Checker Motors Corporation, Plaintiff,

v.David Markin, Defendant.

Bankruptcy No. HK 09–00358.

Adversary Nos. 11–80018, 11–80015, 11–80019, 11–80016.

United States Bankruptcy Court, W.D. Michigan.

June 10, 2013.

Eric D. Carlson, Timothy A. Fusco, Ronald A. Spinner, Marc N. Swanson, Miller Canfield Paddock & Stone, PLC, Detroit, MI, for Defendant.

Joseph J. Gavin, Daniel R. Olson, John T. Piggins, Miller Johnson, Grand Rapids, MI, for Plaintiff.

OPINION RE: TRUSTEE'S DECEMBER 7, 2012 MOTION—PARTIAL SUMMARY JUDGMENT

JEFFREY R. HUGHES, Bankruptcy Judge.

Thomas C. Richardson, the liquidating trustee in this Chapter 11 case (“Trustee”),¹ has commenced these four adversary proceedings to recover fraudulent transfers allegedly made by Debtor to the Defendants.² Among other things, Trustee contends that Debtor was insolvent when each of the challenged transfers was made. The question the court addresses here is whether the withdrawal liability Debtor potentially faced with respect to its participation in a multiemployer retirement plan should be included or not in that calculation.³

BACKGROUND⁴

Trustee seeks to avoid under either Section 548 or Section 544(b)⁵ transfers Debtor made as far back as January 2005. Although Trustee has posited a number of different reasons for avoidance, a primary one is based upon Debtor's alleged insolvency at the time of the transfers and the lack of consideration Defendants gave in exchange. In particular, Section 548 avoids transfers by insolvent debtors if the debtor had received less than “reasonably equivalent value” in return ⁶ and Section 544(b) incorporates Michigan's version of the Uniform Fraudulent Transfer Act (“MUFTA”) ⁷ and its prohibition of transfers made for inadequate value whenever the debtor is insolvent.⁸ Transfers like these are often described as being “constructively fraudulent” on the debtor's part.

As for how the debtor's insolvency is to be determined, both Section 548 and MUFTA compare the fair value of the debtor's assets with the sum of its debts.⁹ This approach equates roughly to a debtor's balance sheet, since that too represents a comparison of an entity's assets with its liabilities at a particular point in time. However, balance sheets seldom include assets at their fair value.¹⁰ Likewise,a balance sheet might not include all of the liabilities that otherwise would be considered for purposes of assessing insolvency when a fraudulent transfer is alleged.

Indeed, the specific issue posed by Trustee's motion here is whether a liability that is seldom, if ever, included on a debtor's balance sheet—i.e., the liability associated with withdrawing from a multiemployer retirement plan—should nonetheless be included in assessing whether any of the challenged transfers should be avoided or not. In raising this issue, Trustee has been careful not to ask for an actual determination of what that liability might have been. As Trustee concedes, that is a question of fact for the jury. ¹¹ Nonetheless, it is clear from the documents provided that the inclusion or not of this amount will significantly tip the scales one way or the other. For example, Debtor's audited financial statements for calendar year 2005 show a net equity of about $6 million. Those statements, though, did not include the $12.6 million in withdrawal liability that was being estimated at that time. Indeed, that estimate had grown to more than $44 million by July of 2008.

DISCUSSION

Withdrawal Liability

Debtor was a member of a multiemployer pension plan during the entire period relevant to these adversary proceedings and Debtor in fact continued to be a member postpetition until June of 2009. As the name suggests, multiemployer plans are distinguished from single employer plans by the number of employers who contribute to a particular pension plan. Multiemployer plans are often associated with industries where there may be many employers but only one or two unions representing the workers.

Multiemployer plans are generally found in the trucking, apparel, coal mining, construction, entertainment, food and baked goods, communication, and public utilities industries. Examples include plans that involve various employers having collective bargaining agreements with locals of the United Mine Workers or Amalgamated Clothing and Textile Workers or the International Typographical Union.¹²

Prior to ERISA,¹³ companies were not accountable to retirement plans for promised benefits should, for example, a company go out of business without having adequately funded the plan.¹⁴ However, ERISA remedied that problem, at least in part, by both creating the Pension Benefit Guaranty Corporation (“PBGC”) and tightening the funding requirements for tax qualified plans.¹⁵

The PBGC offers an insurance program for plan beneficiaries in the event an underfundedplan is terminated. For instance, the PBGC will pay from its own reserves at least a portion of those unfunded benefits. And, like an insurer, the PBGC will then have its own right to recover against the terminating employer.¹⁶

However, multiemployer plans posed a problem from the outset of ERISA because that type of plan was typically not dependent upon the participation of any single employer. Indeed, how and when a particular employer participated in a multiemployer plan depended in large part upon whatever terms were struck with that employer's local union. Consequently, it was possible for an employer to withdraw from a multiemployer plan without the plan itself terminating.

The question raised was whether the PBGC should also insure the beneficiaries of a multiemployer plan should that type of plan ever terminate. By way of background, the federal government does not fund the PBGC. Rather, it is a separate entity that provides for its capitalization in large part through the premiums it assesses against the covered plans.¹⁷ In other words, the PBGC is to be self-supporting, at least in theory. The concern, then, was whether the PBGC could sustain itself if it also took on the risk of multiemployer plan terminations.

Congress initially left that decision to the PBGC, with the PBGC opting to exclude multiemployer plans from its coverage. However, as time passed, it became apparent that more and more multiemployer plans were seriously underfunded. In particular, plans associated with declining industries were suffering because the shrinking employee base could no longer support an often growing number of retirees entitled to fixed benefits.

Moreover, the problem was exacerbated by the ability of employers to withdraw from a multiemployer plan with relatively little exposure. Under ERISA as originally enacted, an employer who withdrew had no accountability for unfunded benefits for its employees under that plan provided that the plan did not terminate within five years. Consequently, employers contributing to a multiemployer plan in a declining industry or a plan that was otherwise at risk were motivated to withdraw while, if you will, the “getting was good.” Early withdrawals, though, only added to the problem by leaving the remaining employers with the burden of contributing even more in order to keep the plan afloat.

As the House Committee on Education & Labor itself observed:

The capacity of a multiemployer plan to meet its benefit commitments depends on the maintenance of a stable or growing contribution base. Discrete instances of withdrawal will not affect the soundness of a plan if the withdrawn employer is replaced by newly entering contributors or expansion of covered employment with other contributing employers. If employer withdrawals are accompanied by a decline in the industry, trade, or craft covered by the plan, however, the resulting funding burden on remaining contributors and active employees may be intolerably high. In highly competitive or marginal industries, such increased costs may make the plan unattractive so that new employers are discouraged from coming into the plan. The solvency of the plan is then threatened, particularly where benefit improvements have been funded over unrealistically long periods of time.¹⁸

Indeed, it was the threat posed by the termination of these increasingly distressed multiemployer plans that had kept Congress from requiring the PBGC to insure such plans when ERISA was first enacted. However, Congress ultimately decided that terminated multiemployer plans had to be covered as well, with that mandatory coverage becoming effective in May of 1980. But that decision also put at risk the solvency of the PBGC. Put simply, unless something was done the PBGC would not be able to survive the expected onslaught of terminated multiemployer plans in declining industries.

Congress responded by also enacting in 1980 the Multiemployer Pension Plan Amendments Act.¹⁹ Although that act incorporated a number of different steps to solve the problem, the important one for purposes here was the imposition of liability upon any employer who chose to withdraw from an underfunded multiemployer plan. Again, the law until then...