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Trustees of Amalgamated Insurance Fund v. McFarlin's Inc.

April 10, 1986

TRUSTEES OF THE AMALGAMATED INSURANCE FUND, PLAINTIFF-APPELLANT,
v.
MCFARLIN'S, INC., DEFENDANT-APPELLEE



Appeal from an order of the Western District of New York, Michael A. Telesca, Judge, affirming the decision of the bankruptcy court, Edward D. Hayes, Judge, holding that "withdrawal liability" by an insolvent employer under 29 U.S.C. §§ 1381 et seq. is not a debt entitled to priority in the employer's Chapter 11 bankruptcy proceeding.

Author: Mansfield

Before: MANSFIELD, PIERCE and MINER, Circuit Judges.

MANSFIELD, Circuit Judge:

The Trustee 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 Bankr. 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. §§ 1381(a) et seq., must be asserted by the Fund as a general unsecured claim and hence is not entitled to propriety as an expense of administering the estate under the Bankruptcy Code 11 U.S.C. § 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 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 subparagraph (A) are exacerbated." MPPAA § 2A(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 8-11. 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. §§ 1101 et seq., McFarlin's was in the business of altering and selling at retail men's and boy's 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 詻⺭꧜ 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 it 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 multiemployer 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 ...


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