Thе 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
“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 аdditional 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 funding obligations for employers who continue to contribute to the plan, adversely affecting the plan, its participants and beneficiaries, and labor-management relations, and
“(B) in a declining industry, the incidence of employer withdrawals is higher and the adverse effects described in sub-paragraph (A) are exacerbated.” MPPAA § 3(a)(4), 29 U.S.C. § 1001a(a)(4).
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 оf the Bankruptcy Code, 11 U.S.C. §§ 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 plаn 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. § 1381(a) provides that if an employer withdraws from a multiem-ployer plan he is liable to the plan in the amount determined under 29 U.S.C. § 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. § 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. § 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 debt- or’s limited resources will be equally distributed among his creditors, statutory priorities are narrowly construed.
Joint Industry Board v. United States,
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 сreditors.
Mammoth Mart, supra,
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,
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 сovered 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
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 emрloyees with pension rights vested in such plans from the “great personal tragedy” of losing those rights when the plans terminated.
Nachman Corp. v. Pension Benefit Guaranty Corp.,
As originally structured ERISA allowed some employers to withdraw from pension plans without requiring them to pay for benefits promised to and earned by their employees. “If an employer wanted to withdraw [from a plan] it could do so without incurring liability, unless the plan terminated within five years of the employer’s withdrawal without аssets sufficient to provide employee benefits” at the level guaranteed by the PBGC.
Textile Workers, supra,
Congress concluded that, if an employer were permitted to withdraw from a plan without paying his share of the funds needed to fully fund the vested benefits of the employees covered by the plan, other employers would be encouraged to desert plans. That, in turn, would endanger the plans themselves, placing a heavy burden on the PBGC and threatening those bene
Congress therefore in 1980 adopted the MPPAA. The Act mandates that if “an employer withdraws from a multiemployer plan in a complete or partial withdrawal,” he incurs a “withdrawal liability” to the plan. 29 U.S.C. § 1381(a). This liability is designed to insure that before leaving a plan an employer would pay his “proportionаte” share of the plan’s liability for vested but unfunded benefits attributable to work already performed. H.R. 869,
supra,
at 67.
See also Textile Workers, supra,
The manner in which the MPPAA calculates withdrawal liability confirms that the liability represents an employer’s accelerated contribution of funds needed to finance employees’ pensiоn rights which have vested at the time of withdrawal but which have not been fully funded at that date. Each of the MPPAA’s four methods of establishing the amount of “withdrawal liability,” 29 U.S.C. § 1391, accordingly extrapolate the employer’s proportionate share of the plan’s unfunded, vested benefits from such factors as the employer’s past contributions to the plan and the portion of the plan’s unfunded benefit obligations attributable to the employer’s employees. H.R. No. 869, supra, at 67, 71, 77-78, 82, House Report (Ways and Means Committee) No. 76-869(11), Apr. 23, 1980, 96th Cong.2d Sess., at 16. Under the “presumptive” method, which the Fund applied in the present case,
“a plan’s unfunded vested benefits accumulated in the years ending before ... [September 25, 1980], are to be allocated to the employers who maintained the plan before that date and continued to maintain the plan after ... [Sept. 25, 1980]. The share of those unfunded vested benefits for which an employer is liable generally depends upon the employer’s proportionate share of total contributions to the plan during the five plan years preceding ... [Sept. 25, 1980]. A change in unfunded vested benefits for a year ending after ... [Sept. 25, 1980] is generally to be allocated to withdrawing employers in proportion to their plan contributiоns for the five plan years preceding the year of withdrawal.” Joint Explanation, supra, at S.20190.
Since withdrawal liability is based on the withdrawing employer’s contributions to the Plan prior to the year before the employer withdraws, 29 U.S.C. § 1391, McFarlin’s withdrawal liability is related to the years 1975-81. The consideration supporting its withdrawal liability was, therefore, the work of employees in the alteration department during those earlier years. Since McFarlin’s did not file for bankruptcy and become a debtor in possession until March 1982, this consideration was not furnished for the benefit of the debtor in possession or for the continuation of McFarlin’s business after it went into bankruptcy. It is attributable to the period pre-dating the filing of the Chapter 11 petition. It cannot, therefore, qualify as an administrative expense within the meaning of §§ 503(b)(1)(A) and 507 of the Bankrupt
The foregoing view finds support in decisions uniformly rejecting the argument that withdrawal liability is entitled to priority as an administrative expense incurred by the trustee in bankruptcy or debtor in possession in order to operate or preserve the business.
Trustees of Amal. Ins. Fund v. Kessler,
Our decision is not inconsistent with cases holding that a bankrupt’s obligation to pay severance pay, which arises out of the termination of an employee during bankruptcy, is an administrative expense entitled to priority.
See, e.g., In re W.T. Grant Co.,
The Fund next argues that, regardless of the foregoing, at least 50% of an insolvent employer’s withdrawal liability is entitled to priority under § 4225(b) of the MPPAA,
Neither the language nor the purpose of § 1405(b)(1) suggests that the first 50% of an employer’s withdrawal liability is entitled to priority over other debts. It establishes only the extent or amount by which a fund claiming withdrawal liability against an insolvent employer will receive full creditor treatment. Congress simply recognized that in certain limited circumstances the interests of the withdrawing employer outweighed those of the employees whose benefits were at stake and of other employers in the Plan who would be required partially to fund the shortfall resulting from the withdrawal. In short, § 1405 amounts to a “special relief rule,” Joint Explanation, supra at S.20195, enacted to enable economically strapped employers to survive and designed to help pension funds by encouraging creditors to lend to such employers. As a further stеp toward assisting the funds in such circumstances, 29 U.S.C. § 1402(a), (b), requires the government to establish a program under which Multiemployer Pension and Employee Benefit Plans will be reimbursed for withdrawal liability payments that are uncollectible because the withdrawing employer has undergone Chapter 11 or similar proceedings.
For the foregoing reasons the order of the district court is affirmed.
Notes
. Title 11 U.S.C. §§ 503, 507 are part of the Bankruptcy Cоde. The Code supplanted the Bankruptcy Act in October 1979. The Act had accorded administrative expenses a priority. Bankruptcy Act § 64a(1); 11 U.S.C. § 104(a)(1). Title 11 U.S.C. § 503(b)(1)(A), which defines administrative expense as including the actual necessary expenses of preserving the estate, is derived from § 64a(1), Senate Report (Judiciary Committee) No. 95-989, July 14, 1978, 66 reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 5852; House Report (Judiciary Committee) No. 95-595, Sept. 8, 1977, 355 reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 6311.
Accordingly, judicial interpretations of the old 11 U.S.C. § 104(a)(1) are relevant to the interpretation of the new 11 U.S.C. § 503(b)(1)(A).
See, e.g., Matter of Jartran, Inc.,
.
Having concluded that under the terms of the MPPAA withdrawal liability is attributable to a period pre-dating the McFarlin’s Chapter 11 proceeding and cannot therefore be treated as an administrative expense, we need not express any views regarding the Bankruptcy Court’s rationale to the effect that the same result is dictated by 11 U.S.C. § 365(a). Under that provision the debtor-in-possession’s rejection of an executory contract such as a collective bargaining agreement,
N.L.R.B. v. Bildisco and Bildisco,
However, we do note that withdrawal liability does not derive from the collective bargaining agreement but from the MPPAA and that reliance on § 365 of the Bankruptcy Code would appear to conflict with the MPPAlA's prоvision, 29 U.S.C. § 1383(a), (e), that withdrawal occurs when an employer “permanently ceases all covered operations under the plan” (emphasis supplied). In this case that did not occur until November 1982.
. Section 4225(b) of the MPPAA, 29 U.S.C. § 1405(b) provides in pertinent part:
"In the case of an insolvent employer undergoing liquidation or dissolution, the unfunded vested benefits allocable to that employer shall not exceed an amount equal to thе sum of—
(1) 50 per cent of the unfunded vested benefits allocable to the employer (determined without regard to this section), and
(2) that portion of 50 per cent of the unfunded vested benefits allocable to the employer (as determined under paragraph (1) which does not exceed the liquidation or dissolution value of the employer determined—
(a) as of the commencement of liquidation or dissolution, and
(b) after reducing the liquidation or dissolution value of the employer by the amount determined under paragraph (1).”