Trustees of Amalgamated Ins. Fund v. McFarlin's, Inc.

• Decision Date: 10 April 1986
• Docket Number: No. 521,D,521
• Court: U.S. Court of Appeals — Second Circuit
• Parties: , 14 Collier Bankr.Cas.2d 1075, Bankr. L. Rep. P 71,096, 7 Employee Benefits Ca 1426 TRUSTEES OF the AMALGAMATED INSURANCE FUND, Plaintiff-Appellant, v. McFARLIN'S, INC., Defendant-Appellee. ocket 85-5064.

Page 98

789 F.2d 98

54 USLW 2542, 14 Collier Bankr.Cas.2d 1075, Bankr. L. Rep. P 71,096, 7 Employee Benefits Ca 1426 TRUSTEES OF the AMALGAMATED INSURANCE FUND, Plaintiff-Appellant, v. McFARLIN'S, INC., Defendant-Appellee.

No. 521, Docket 85-5064.

United States Court of Appeals, Second Circuit.

Argued Nov. 26, 1985.

Decided April 10, 1986.

Michael T. Harren, Rochester, N.Y. (Brian F. Curran, Thomas G. Collins, Chamberlain, D'Amanda, Oppenheimer & Greenfield, Rochester, N.Y., of counsel), for plaintiff-appellant.

Jay R. Indyke, New York City (Lawrence C. Gottlieb, Siegel, Sommers & Schwartz, New York City, of counsel), for defendant-appellee.

Before MANSFIELD, PIERCE and MINER, Circuit Judges.

MANSFIELD, Circuit Judge:

The Trustees of the Amalgamated Insurance Fund ("The Fund") appeal from an order of the Western District of New York, Michael A. Telesca, Judge, affirming without opinion a decision of Judge Edward D. Hayes of the bankruptcy court (reported at 46 B.R. 88 (1985)) in the Chapter 11 bankruptcy of McFarlin's Inc. The decision held that "withdrawal liability" incurred by McFarlin's under the Multiemployer Pension Plan Amendments Act (MPPAA), 29 U.S.C. Secs. 1381(a) et seq., must be asserted by the Fund as a general unsecured claim and hence is not entitled to priority as an expense of administering the estate under the Bankruptcy Code, 11 U.S.C. Sec. 507, or under the MPPAA. We affirm.

"Withdrawal liability" is a term used to describe an employer's obligation, upon his withdrawing from a multiemployer pension and employee benefit plan requiring him to make periodic payments toward employees' insurance and pensions, to make a lump sum payment of additional money to the fund. This payment is required to satisfy the employer's pro rata share of the vested but unfunded benefits to be paid to employees participating in the plan, including those employed by others. The obligation was created by Congress after it found that

"(A) withdrawals of contributing employers from a multiemployer pension plan frequently result in substantially increased "(B) in a declining industry, the incidence of employer withdrawals is higher and the adverse effects described in subparagraph (A) are exacerbated." MPPAA Sec. 3(a)(4), 29 U.S.C. Sec. 1001a(a)(4).

funding obligations for employers who continue to contribute to the plan, adversely affecting the plan, its participants and beneficiaries, and labor-management relations, and

Congress was concerned that, unless a withdrawing employer assumed such a liability, the remaining employer participants would be unable to shoulder the increased burden caused by the withdrawal, which might lead to a collapse of the entire multi-employer plan. See infra at 102-103. The withdrawal payment is not made by the withdrawing employer to his own employees but to the Fund in order to help defray the total unfunded vested liability of the pension plan to which he had been contributing.

Before filing for reorganization under Chapter 11 of the Bankruptcy Code, 11 U.S.C. Secs. 1101 et seq., McFarlin's was in the business of altering and selling at retail men's and boys' clothing. The employees in its alteration department were represented by the Amalgamated Clothing and Textile Workers Union, AFL-CIO ("Union"). Under its collective bargaining agreement with that union McFarlin's made weekly contributions amounting to 15% of the gross wages of those employees to the Fund, a multiemployer pension and benefit plan which provided retirement, life, accident and health insurance to the covered employees.

On March 16, 1982, McFarlin's filed its Chapter 11 petition and was authorized to operate its business as a debtor in possession. Thereafter it maintained its alteration department for a time, employing persons covered by the collective bargaining agreement and making all required contributions to the Fund. On or about November 13, 1982, however, McFarlin's closed its alteration department and, though it retained its sales staff, "effective that date [it] permanently ceased all operations employing employees covered by the Plan."

Title 29 U.S.C. Sec. 1381(a) provides that if an employer withdraws from a multiemployer plan he is liable to the plan in the amount determined under 29 U.S.C. Sec. 1391 to be his "withdrawal liability." The Trustees of the Fund, after determining that McFarlin's withdrawal liability was $57,969.76, filed a claim for that amount in the Chapter 11 proceeding and asserted that the withdrawal liability was an expense of administration entitled to first priority under 11 U.S.C. Sec. 507(a)(1). In response, McFarlin's Creditor's Committee requested the bankruptcy court to reclassify the debt as a general unsecured claim.

McFarlin's thereafter went out of business and the Creditor's Committee proposed a liquidation plan which was approved by the bankruptcy court on September 1, 1984. Under Article VI of that plan, McFarlin's rejected all executory contracts, including its collective bargaining agreement with the Union, which it had not confirmed while operating as debtor in possession.

On January 28, 1985, the bankruptcy court ruled that the McFarlin's withdrawal liability gave rise to a general unsecured claim, not an administrative expense meriting priority over McFarlin's other debts. The Western District of New York affirmed without opinion.

DISCUSSION

The central question is whether the provisions of the Bankruptcy Code or the MPPAA mandate that McFarlin's "withdrawal liability" be given first priority among McFarlin's debts. The Bankruptcy Code, 11 U.S.C. Sec. 507, defines those expenses and claims against a bankrupt estate that are entitled to priority in a bankruptcy proceeding. Because the presumption in bankruptcy cases is that the debtor's limited resources will be equally distributed among his creditors, statutory priorities are narrowly construed. Joint Industry Board v. United States, 391 U.S. 224, 228, 88 S.Ct. 1491, 1493, 20 L.Ed.2d 546 (1968); In re United Merchants & Manufacturers, Inc., 597 F.2d 348, 349 (2d Cir.1979); In re Mammoth Mart, Inc., 536 F.2d 950, 953 (1st Cir.1976). "[I]f one claimant is to be preferred over others, the purpose should be clear from the statute." Nathanson v. N.L.R.B., 344 U.S. 25, 29, 73 S.Ct. 80, 83, 97 L.Ed. 23 (1952). See also Matter of Jartran, Inc., 732 F.2d 584, 586 (7th Cir.1984).

Section 507 gives first priority to "administrative expenses allowed under [11 U.S.C.] section 503(b)." Section 503(b)(1)(A) defines administrative expenses as including "the actual, necessary costs and expenses of preserving the estate, including wages, salaries or commissions for services rendered after the commencement of the case." ¹ The Fund contends McFarlin's withdrawal liability satisfies that definition. We disagree.

Congress granted priority to administrative expenses in order to facilitate the efforts of the trustee or debtor in possession to rehabilitate the business for the benefit of all the estate's creditors. Mammoth Mart, supra, 536 F.2d at 953. See also Yorke v. N.L.R.B., 709 F.2d 1138, 1143 (7th Cir.1983) (administrative expenses arise from operating the estate "in the overall interests of the creditors."). Congress reasoned that unless the debts incurred by the debtor in possession could be given priority over the debts which forced the estate into bankruptcy in the first place, persons would not do business with the debtor in possession, which would inhibit rehabilitation of the business and thus harm the creditors. Mammoth Mart, supra, 536 F.2d at 953. See also Jartran, supra, 732 F.2d at 586; Matter of Fuzzy Thurston's Eau Claire Left Guard, 33 B.R. 579, 581 (Bankr., W.D.Wisc.1983).

Accordingly, an expense is administrative only if it arises out of a transaction between the creditor and the bankrupt's trustee or debtor in possession, Jartran, supra, 732 F.2d at 587; Straus-Duparquet, Inc. v. Local U. No. 3 Int. Bro. of Elec. Wkrs., 386 F.2d 649, 651 (2d Cir.1967) and "only to the extent that the consideration supporting the claimant's right to payment was both supplied to and beneficial to the debtor-in-possession in the operation of the business." Mammoth Mart, supra, 536 F.2d at 954. See also Jartran, supra, 732 F.2d at 587; In re Freedomland, Inc., 480 F.2d 184, 189 (2d Cir.1973); American A. & B. Coal Corp. v. Leonardo Arrivabene, S.A., 280 F.2d 119, 124 (2d Cir.1960); In re Baths International Inc., 31 B.R. 143, 145 (S.D.N.Y.1983). A debt is not entitled to priority simply because the right to payment arises after the debtor in possession has begun managing the estate. Jartran, supra, 732 F.2d at 587; Mammoth Mart, supra, 536 F.2d at 955.

Thus, whether the McFarlin's "withdrawal liability" is an administrative expense depends upon the consideration supporting the Fund's right to receive it. The history of the MPPAA demonstrates that the employer's lump sum payment in satisfaction of his withdrawal liability is made to guarantee pension benefits already earned by those employees covered by the Plan. Were the employer not withdrawing from the plan, he would be obligated to continue making periodic contributions to the Fund after his withdrawal. The consideration supporting the withdrawal liability is, therefore, the same as that supporting the pensions themselves, the past labor of the employees covered by the Plan. See, e.g., House Report (Education and Labor Committee) No. 93-533, Oct. 2, 1973, reprinted in 1974 U.S.Code Cong. & Ad.News 4639, 4640 (pension payments deferred compensation for labor).

The MPPAA was enacted as a result of experience following World War II, when steadily increasing numbers of employees successfully bargained with their employers for pension benefits. Id. 4640-41. Most employers provided the benefits through private plans. Id. In 1974 Congress adopted the Employee Retirement Income Security Act (ERISA) to protect employees with pension rights vested in such plans from...