Sunarhauserman, Inc., In re

• Decision Date: 08 December 1997
• Docket Number: No. 96-3665,96-3665
• Parties: 38 Collier Bankr.Cas.2d 1300, 21 Employee Benefits Cas. 1777, Pens. Plan Guide (CCH) P 23937X In re: SUNARHAUSERMAN, INC. and Hauserman, Inc., Debtors. PENSION BENEFIT GUARANTY CORPORATION, Appellant, v. SUNARHAUSERMAN, INC. and Hauserman, Inc., Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 811

126 F.3d 811

38 Collier Bankr.Cas.2d 1300, 21 Employee

Benefits Cas. 1777,

Pens. Plan Guide (CCH) P 23937X

In re: SUNARHAUSERMAN, INC. and Hauserman, Inc., Debtors PENSION BENEFIT GUARANTY CORPORATION, Appellant, v. SUNARHAUSERMAN, INC. and Hauserman, Inc., Appellees.

No. 96-3665.

United States Court of Appeals Sixth Circuit.

Argued April 28, 1997.

Decided Sept. 25, 1997.

Rehearing and Suggesetion for Rehearing En Banc Denied Dec.

8, 1997. ^*

Arthur I. Harris, Asst. U.S. Atty. (briefed), Office of the U.S. Attorney, Cleveland, OH, Israel Goldowitz, William G. Beyer (briefed), Nathaniel Rayle (argued and briefed), James J. Keightley (briefed), Susan E. Birenbaum (briefed), Pension Benefit Guaranty Corporation, Office of the General Counsel, Washington, DC, for Appellant.

Jerome Leiken (briefed), Marvin A. Sicherman (argued), Dettelbach, Sicherman & Baumgart, Cleveland, OH, for Appellees.

Before: MARTIN, Chief Judge, KENNEDY and BOGGS, Circuit Judges.

MARTIN, C.J., delivered the opinion of the court, in which BOGGS, J., joined. KENNEDY, J. (pp. 821-23), delivered a separate dissenting opinion.

BOYCE F. MARTIN, Jr., Chief Judge.

The Pension Benefit Guaranty Corporation appeals the district court's order holding that less than the entire amount of the Hauserman, Inc. Salaried Employees' Retirement Income Trust and Plan's claim for unpaid minimum funding contributions accruing post-petition was entitled to administrative priority. For the reasons set forth below, we affirm.

I.

In 1958, Hauserman, Inc. established the Hauserman, Inc. Salaried Employees' Retirement Income Trust and Plan as a tax-qualified defined benefit pension plan covered by Title IV of the Employee Retirement Income Security Act. At all times relevant to this dispute, Hauserman was the contributing sponsor of the Plan within the meaning of 29 U.S.C. §§ 1301(a)(13) and 1362(a), and the administrator of the Plan within the meaning of 29 U.S.C. §§ 1002(16) and 1301(a)(1). As contributing sponsor, Hauserman made contributions to the Plan until October 15, 1989, when it failed to make a quarterly contribution. Thereafter, debtors Hauserman and Sunarhauserman, Inc. ceased contributing to the Plan, with the exception of a contribution of $26,233 made on December 14, 1989.

The Plan's fiscal year ran from July 1 to June 30. As of July 1, 1989, the Plan provided benefits for approximately six hundred and eighty-nine participants: one hundred and ninety-four retired participants and beneficiaries receiving payments from the Plan; one hundred and sixty-two terminated, vested participants who would be entitled to benefits in the future; and three hundred and thirty-three active employee/participants who were continuing to accrue pension benefits.

On October 5, 1989, the Debtors petitioned for relief under Chapter 11 of the Bankruptcy Code. Shortly after the petition date, the Debtors moved the bankruptcy court for authorization to terminate the Plan in a distress termination pursuant to 29 U.S.C. § 1341(c). During bankruptcy, the Debtors amended the Plan, effective February 13, 1990, to freeze all further benefit accruals under the Plan. The Debtors and Pension Benefit subsequently entered into an agreement, effective April 1, 1990, which terminated the Plan pursuant to 29 U.S.C. §§ 1341 and 1342(c), fixed the Plan's termination date at April 30, 1990, and appointed Pension Benefit as trustee of the Plan pursuant to 29 U.S.C. § 1342(b) and (c).

The Debtors continued to operate their business and employ a work force during bankruptcy, although several workforce reductions took place, ultimately decreasing the number of active employee/participants in the Plan from two-hundred sixty immediately prior to the October 5, 1989 commencement of the Debtors' bankruptcy case to thirtythree on February 17, 1990. On April 30, the Plan was formally terminated.

On July 16, 1990, Pension Benefit filed four proofs of claim against the Debtors relating to the Plan, only one of which is relevant to this appeal. That claim sought Chapter 11 administrative expense priority in the amount of $338,143.00 for unpaid post-petition minimum funding contributions accruing between October 5, 1989 and April 30, 1990, the date of the Plan's termination. The Debtors filed general objections to Pension Benefit's claims, disputing the amount and priority of each of the claims on various grounds. Pension Benefit subsequently filed a motion for summary judgment, which the Debtors opposed. The bankruptcy court heard argument on the motion for summary judgment on September 22, 1994. At the conclusion of the hearing, and at the request of the bankruptcy court, the parties submitted a supplemental stipulation indicating the amount of the "normal cost" and "non-normal cost" components of Pension Benefit's administrative expense claim, as well as the "normal cost" component adjusted to take into account post-petition reductions in the Debtors' workforce and the post-petition freeze of benefit accruals. ¹

On June 15, 1995, the bankruptcy court entered a Memorandum of Opinion and Order holding that the "non-normal cost" component of Pension Benefit's claim was not entitled to administrative expense priority because it was based on an experience loss that was realized pre-petition. The bankruptcy court also adjusted the "normal cost" component of Pension Benefit's administrative expense claim to reflect the post-petition decrease in the Debtors' workforce and freeze of benefit accruals.

Accordingly, the bankruptcy court allowed Pension Benefit's claim as an administrative expense under 11 U.S.C. § 503(b) in the amount of $67,612.00. ² On June 27, 1995, Pension Benefit moved to amend the bankruptcy court's order to clarify that "the portions of the Pension Benefit Guaranty Corporation's claim that had been adjudged not to be a priority shall be allowed as general unsecured claims." The bankruptcy court granted Pension Benefit's motion and entered an amended order on July 5. Pension Benefit filed a timely notice of appeal on July 17.

The district court took the case on briefs without oral argument. On April 10, 1996, the district court affirmed the decision of the bankruptcy court, adopting the bankruptcy court's Memorandum of Opinion and Order as its own. Pension Benefit timely appealed the district court's decision to this Court on June 10, challenging only the lower court's decision regarding the administrative expense claim.

II.

On appeal, Pension Benefit argues that the courts below improperly limited administrative expense priority to that portion of the post-petition minimum funding contribution claim attributable to pension benefits actually earned by employee/participants employed by the debtors during their post-petition operations.

Pension Benefit raises three principal objections to the district court's order. First, it argues that the lower courts improperly applied the "benefit to the estate" test, which requires that a claim be based on consideration after the bankruptcy petition is filed in order to be entitled to administrative expense priority. Second, Pension Benefit asserts that it was error for the lower courts to allocate the Debtors' minimum funding obligation to pre- and post-petition periods. Finally, Pension Benefit challenges the lower courts' adjustment of the "normal cost" component of its claim to reflect post-petition workforce reductions and the freeze on benefit accruals. After reviewing the statutory provisions and actuarial principles relevant to an employer's responsibility for funding its pension benefit plan, we will address each of these issues in turn.

The Minimum Funding Standard and Actuarial Principles

An employer's decision to establish a pension plan is entirely voluntary, but its incentives to do so include improved relations with employees and certain tax advantages. If a plan is "tax qualified" under the Internal Revenue Code, an employer may usually deduct contributions required to fund the promised benefits. 26 U.S.C. § 404 (1997). Funds contributed by an employer are generally held in trust and earn income on a tax-free basis. 29 U.S.C. § 1103 (1985); 26 U.S.C. §§ 401, 501 (1997). Under a defined benefit plan, the plan pays a fixed benefit from its assets to participants who meet the conditions specified in the written plan document.

Once an employer establishes a defined benefit plan, such as the Plan at issue in this case, it must fund the plan in accordance with the minimum funding standard imposed by the Employee Retirement Income Security Act of 1974, as amended, 29 U.S.C. § 1082 (1997), and the Internal Revenue Code, 26 U.S.C. § 412 (1997). ³ The minimum funding standard requires every employer maintaining a tax-qualified plan to fund the plan until it is terminated, in amounts determined by the plan's enrolled actuary in accordance with ERISA and the Internal Revenue Code. The statutory rules impose both a minimum required contribution and a maximum amount that may be deducted annually. 29 U.S.C. § 1082; 26 U.S.C. §§ 404, 412.

The minimum funding rules require the plan sponsor to maintain a ledger account, termed the "funding standard account." 29 U.S.C. § 1082(b)(1); 26 U.S.C. § 412(b)(1). The sponsor's annual contribution must be sufficient to eliminate any "accumulated funding deficiency" in the plan's funding standard account. 29 U.S.C. § 1082(a)(2); 26 U.S.C. § 412(a)(2). That is, the account must have a zero or positive balance "as of the end of [the] plan year." 29 U.S.C. § 1082(a)(1); 26 U.S.C. § 412(a)(1). Although liability for the annual minimum funding contribution accrues over the course of the plan year, the resulting debt is required to be paid in quarterly installments. 29 U.S.C. § 1082(e); 26 U.S.C. § 412(m). Any remaining amount due for the plan year must be contributed no later than eight and one-half months after the close of the plan year to be considered a catch-up payment deemed to have...