Great Atlantic Withdrawal Liability Union Brief

7/28/2019 Great Atlantic Withdrawal Liability Union Brief

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UNITED STATES BANKRUPTCY COURTFOR THE SOUTHERN DISTRICT OF NEW YORK

)

In re: ) Chapter 11)THE GREAT ATLANTIC & PACIFIC TEACOMPANY, INC., et al.

))

Case No. 10-24549 (RDD)

)Debtors. ) Jointly Administered

)

FOOD EMPLOYERS LABOR RELATIONS ASSOCIATION AND UNITED FOODAND COMMERCIAL WORKERS PENSION FUNDS SUPPLEMENTAL BRIEF

SLEVIN & HART, P.C.1625 Massachusetts Ave., NW, Suite 450Washington, DC 20036(202) 797-8700

Barry S. Slevin, Esq.Jeffrey S. Swyers, Esq.Laura Offenbacher Aradi, Esq.

HALPERIN BATTAGLIA RAICHT, LLP555 Madison Avenue, 9th FloorNew York, NY 10022(212) 765-9100Alan D. Halperin, Esq.Donna H. Lieberman, Esq.Julie D. Dyas, Esq.

Co-Counsel for the Food Employers Labor

Relations Association and United Food and

Commercial Workers Pension Fund

10-24549-rdd Doc 4243 Filed 06/13/13 Entered 06/13/13 16:16:37 Main DocumentPg 1 of 27

1024549130613000000000003

Docket #4243 Date Filed: 6/13/20


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TABLE OF CONTENTS

TABLE OF AUTHORITIES ......................................................................................................... iii

PRELIMINARY STATEMENT .....................................................................................................1

DISCUSSION ..................................................................................................................................3

I. The Pension Fund is entitled to recover the post-petition portionof A&Ps withdrawal liability as an administrative claim. ......................................3

II. When calculating the portion of the Pension Funds withdrawalliability claim that is entitled to administrative expense priority,the Court must give effect to both ERISA and the BankruptcyCode .........................................................................................................................5

A. The calculation of the Pension Funds administrativeclaim must take into account the Pension Funds statusas a defined benefit plan under ERISA ....................................................6

B. The calculation of the Pension Funds administrativeclaim must take into account the fact that, by itsparticipation in a multiemployer defined benefit pensionfund, A&P promised to help fund a portion of all thebenefits payable under the Pension Fund, not just thebenefits payable to its own employees.........................................................8

1. ERISA prohibits the Reorganized Debtors fromdefining the scope of A&Ps post-petitionwithdrawal liability obligation solely based onthe post-petition benefit accruals of A&Ps ownemployees ........................................................................................9

2. The Reorganized Debtors post-petition withdrawalliability obligation to the Pension Fund must bebased on its proportionate share of the entirePension Funds unfunded liabilities ...............................................12

III. The $7,219,172 post-petition portion of the Pension Funds

withdrawal liability claim is entitled to priority as anadministrative expense ...........................................................................................13

A. The Pension Funds administrative claim calculationcomplies with ERISA because it apportions A&Ps totalwithdrawal liability obligation between the pre- and post-petition time periods ..................................................................................13



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B. The Pension Funds administrative claim calculationcomplies with the Bankruptcy Code because it meets thecriteria for administrative priority under the BankruptcyCode ...........................................................................................................15

1. The Reorganized Debtors received considerationsupporting the Pension Funds right to anadministrative claim of $7,219,172 ..............................................15

2. The Reorganized Debtors benefited from theconsideration they received during the post-petition period ...............................................................................16

C. A&Ps method of calculating the Pension Fundsadministrative claim does not comply with ERISA andinstead attempts to redefine A&Ps post-petitionwithdrawal liability obligation in a way that has no

relationship to A&Ps actual withdrawal liability underERISA .......................................................................................................18

CONCLUSION ..............................................................................................................................21

CERTIFICATE OF SERVICE ......................................................................................................22



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TABLE OF AUTHORITIES

CasesArtistic Carton, 971 F.2d at 1350 ................................................................................................. 15

Concrete Pipe & Prods. v. Constr. Laborers Pension Trust,508 U.S. 602 (1993) .................................................................................................. 8, 9, 15

Connolly v. Pension Benefit Guar. Corp., 475 U.S. 211 (1986) ........................................ 7, 15, 24

Gastronomical Workers Union Local 610 & Metro. Hotel Assn Pension Fund v. Dorado Beach

Hotel Corp., 617 F.3d 54 (1st Cir. 2010) .......................................................................... 10

Hughes Aircraft Co. v. Jacobson, 525 U.S. 432 (1999) ........................................................... 8, 24

In re Adelphia Bus. Sols., Inc., 296 B.R. 656 (Bankr. S.D.N.Y. 2003) .................................... 3, 18

In re Anything Elec. Contrs. Co., No. 96-10751, 2005 Bankr. LEXIS 3447(Bankr. N.D.N.Y. Jan. 18, 2005) ...................................................................................... 14

In re Cott Corp., 47 B.R. 487 (Bankr. D. Conn. 1984) .........................................................passim

In re M & S Grading, Inc., No. 02-81632, 2009 Bankr. LEXIS 2021(Bankr. D.Neb. July 27, 2009) .......................................................................................... 13

In re Marcal Paper Mills, Inc., 650 F.3d 311 (3d Cir. 2011) ................................................passim

In re NP Mining, 963 F2d 1449 (11th Cir. 1992) ......................................................................... 20

In re Old Carco LLC, 424 B.R. 650 (Bankr. S.D.N.Y. 2010) ...................................................... 19

In re Patient Educ. Media, 221 B.R. 97 (Bankr. S.D.N.Y. 1998) ................................................ 19

In re Pulaski, 57 B.R. 502 (Bankr. M.D. Tenn. 1986) ......................................................... 4, 6, 19

In re Refco, Inc., No. 07-4784, 2008 U.S. Dist. LEXIS 2484(S.D.N.Y. Jan. 14, 2008) ................................................................................................... 20

In re Sunarhauserman, 184 B.R. 279 (N.D. Ohio 1995) .................................................. 22, 23, 24

In re World Sales, 183 B.R. 872 (B.A.P. 9th Cir. 1995) .............................................................. 13

LTV Steel Co. v. Shalala (In re Chateaugay Corp.),53 F.3d 478 (2d Cir. 1995)........................................................................................ 6, 7, 16

Morton v. Mancari, 417 U.S. 535 (1974) ....................................................................................... 6

Reading Co. v. Brown, 391 U.S. 471 (1968) ................................................................................ 20



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Riverwood Intl Corp. v. Olin Corp. (In re Manville Forest Prods. Corp.),225 B.R. 862 (Bankr. S.D.N.Y. 1998) ................................................................................ 7

Strobl v. New York Mercantile Exch., 768 F.2d 22 (2d Cir. 1985) ................................................. 6

Trs. of the Amal. Ins. Fund v. McFarlins, Inc. (In re McFarlins, Inc.) ,789 F.2d 98 (2d Cir. 1986).........................................................................................passim

Statutes11 U.S.C. 101 ............................................................................................................................. 10

11 U.S.C. 503 ......................................................................................................................passim

29 U.S.C. 1002 ..................................................................................................................... 10, 11

29 U.S.C. 1082 ....................................................................................................................passim

29 U.S.C. 1084 ....................................................................................................................passim

29 U.S.C. 1391 ..................................................................................................................... 14, 18



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FOOD EMPLOYERS LABOR RELATIONS ASSOCIATION AND UNITED FOODAND COMMERCIAL WORKERS PENSION FUNDS SUPPLEMENTAL BRIEF

The Food Employers Labor Relations Association and United Food and Commercial

Workers Pension Fund (the Pension Fund or Fund) provides this supplemental brief in

connection with its motion for entry of an order allowing its administrative expense claim in the

amount of $7,219,172 in the bankruptcy action of the Great Atlantic & Pacific Tea Company,

Inc. (A&P) and its affiliates as reorganized debtors (the Reorganized Debtors).

Preliminary Statement

At the hearing on June 27, 2013, the parties will present to the Court competing methods

for calculating the Pension Funds administrative claim for withdrawal liability. Withdrawal

liability is a statutory mechanism under Employee Retirement Income Security Act of 1974

(ERISA), as amended by the Multiemployer Pension Plan Amendments Act of 1980

(MPPAA), for assessing a portion of unfunded liabilities to employers that withdraw from an

underfunded multiemployer defined benefit plan. Upon A&Ps withdrawal from the Pension

Fund on January 31, 2012, the Reorganized Debtors became obligated to pay withdrawal liability

to the Pension Fund in the total amount of $77,420,079. A portion of this total withdrawal

liability is attributable to the post-petition bankruptcy period, and thus the Pension Fund asks that

the Court compel the Reorganized Debtors to pay the Pension Funds administrative claim for

this post-petition withdrawal liability pursuant to the requirements of the Bankruptcy Code, 11

U.S.C. 503(b)(1)(A).

The Pension Fund is entitled to recover a portion of its withdrawal liability as an

administrative expense. A number of courts have found that withdrawal liability can be

apportioned between the pre- and post-petition liabilities, and the post-petition portion should be

granted administrative priority. While few courts have addressed how to calculate an



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administrative claim for withdrawal liability, it is clear that the calculation method the Court

adopts must give effect to both of the comprehensive statutory schemes implicated by the

Pension Funds administrative claim the Bankruptcy Code and ERISA.

Each of the parties advocates a starkly different method of calculating the Funds

administrative claim. The Pension Fund, which seeks administrative expense priority for

$7,219,172 of its $77 million claim for withdrawal liability against the Reorganized Debtors (the

balance of which is general unsecured), bases its calculation upon the Bankruptcy Code, ERISA

and its own Withdrawal Liability Rules. The effect of the Pension Funds calculation is to pro-

rate the portion of A&Ps withdrawal liability that was incurred post-petition (20 days in 2010

and all of 2011), yielding an administrative claim of $7.2 million.

By contrast, the Reorganized Debtors advocate an administrative claim calculation

method that has no relationship to the calculation of its withdrawal liability obligation to the

Fund under ERISA. The Reorganized Debtors argue that the Pension Funds administrative

claim should be the difference between the post-petition pension benefits accrued by A&P

employees, and the post-petition contributions A&P made to the Fund on the employees behalf.

However, based on the unique characteristics of defined benefit multiemployer pension funds,

explained in detail below, this method absurdly results in an administrative claim that is a

negative number.

Because only the Pension Funds administrative claim calculation gives effect both to the

Bankruptcy Codes provision for administrative claims and ERISAs rules regarding withdrawal

liability, whereas the Reorganized Debtors method completely disregards both, the Court must

apply the Pension Funds method and allow its administrative claim for $7.2 million.



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Discussion

I. The Pension Fund is entitled to recover the post-petition portion of A&Pswithdrawal liability as an administrative claim.

The Pension Fund is entitled to claim the post-petition portion of A&Ps withdrawal

liability as an administrative expense under 11 U.S.C. 503(b)(1)(A). As the party claiming an

administrative expense, the Pension Fund bears the burden of proving the claim qualifies for

administrative priority under the Bankruptcy Code.In re Adelphia Bus. Sols., Inc., 296 B.R. 656,

662 (Bankr. S.D.N.Y. 2003).

The payment of withdrawal liability is a statutorily imposed cost of providing benefits by

an employer participating in a multiemployer defined benefit pension plan under a collective

bargaining agreement. Of the few cases that have addressed this issue, the weight of authority

favors allowing administrative priority for the post-petition portion of a debtors withdrawal

liability. See In re Marcal Paper Mills, Inc., 650 F.3d 311, 320 (3d Cir. 2011) (granting

administrative priority for post-petition portion of withdrawal liability); In re Pulaski, 57 B.R.

502, 509 (Bankr. M.D. Tenn. 1986) (same); In re Cott Corp., 47 B.R. 487, 491-92 (Bankr. D.

Conn. 1984) (same).

In the only Second Circuit decision to address this issue, the Court declined to allow an

administrative expense claim, but recognized the possibility that an administrative claim for

post-petition withdrawal liability would be allowable under different facts. Trs. of the Amal. Ins.

Fund v. McFarlins, Inc. (In re McFarlins, Inc.), 789 F.2d 98, 103-04 (2d Cir. 1986). In

McFarlins, the employers withdrawal date and its bankruptcy petition date both occurred

during the same plan year.Id. at 103. Because an employers withdrawal liability is calculated as

of the last day of the plan year ending before its withdrawal date, the employees post-petition

work was not part of the employers withdrawal liability obligation to that pension fund. Id.



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Therefore, the Court found that the employers post-petition participation in the fund did not take

place for the benefit of the estates creditors.Id. at 103-04.

Here, by contrast, A&Ps employees continued to work, and thus A&P continued to

participate in the Pension Fund, for one year and 20 days after A&P filed its bankruptcy petition,

and then A&P withdrew during the second Plan Year (here, a calendar year) following its

bankruptcy petition date. Therefore, unlike in McFarlins, the post-petition work of A&Ps

employees impacted the calculation of A&Ps withdrawal liability obligation to the Fund. Put

more precisely, in exchange for receiving the post-petition services of A&Ps employees, the

Reorganized Debtors continued to participate in the Pension Fund, and thus knowingly incurred

the additional withdrawal liability costs that were inherent in continuing to participate in the

Pension Fund for 385 post-petition days. (See Declaration of Kevin Woodrich, Doc. No. 4094

(Woodrich Decl.) 14; Deposition of Kevin Woodrich (Woodrich Dep.) 79:15-81:22,

144:9-145:9.) Accordingly, even under the McFarlins holding, because A&P employed

employees during the Plan Year following the Plan Year in which it filed for bankruptcy, A&P

owes withdrawal liability for the post-petition period as an administrative expense.

The Third Circuit, inIn re Marcal Paper Mills, Inc., recently affirmed the district courts

granting of administrative priority for the post-petition portion of a debtors withdrawal liability.

650 F.3d at 320. In reaching its conclusion, the Court observed that conferring administrative

priority on the post-petition portion of the employers withdrawal liability enables the statutory

schemes of ERISA and the Bankruptcy Code to coexist: In holding that withdrawal liability can

be apportioned between pre- and post-petition time periods and that the post-petition portion can

be classified as an administrative expense, we harmonize the purposes of the Bankruptcy Code

and ERISA, as amended by the MPPAA, as we are required to do. Id. This same goal of

harmonizing the two statutes likewise applies to the Pension Funds administrative claim.



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Finally, other courts also have recognized that withdrawal liability can and should be

apportioned between pre- and post-petition time periods, to effectuate both bankruptcy law and

ERISA. See, e.g.,Pulaski, 57 B.R. at 508; Cott, 47 B.R. at 492.

II. When calculating the portion of the Pension Funds withdrawal liability claim thatis entitled to administrative expense priority, the Court must give effect to bothERISA and the Bankruptcy Code.

The Pension Funds administrative claim for withdrawal liability implicates two

comprehensive statutes, the Bankruptcy Code and ERISA, and the Court must give effect to

both. Statutes are to be construed together to effectuate, to the greatest extent possible, the

legislative policies of both. Strobl v. New York Mercantile Exch., 768 F.2d 22, 30 (2d Cir.

1985). The courts are not at liberty to pick and choose among congressional enactments, and

when two statutes are capable of co-existence, it is the duty of the courts, absent a clearly

expressed congressional intention to the contrary, to regard each as effective. Morton v.

Mancari, 417 U.S. 535, 551 (1974). See also Marcal, 650 F.3d at 320;LTV Steel Co. v. Shalala

(In re Chateaugay Corp.), 53 F.3d 478, 498 (2d Cir. 1995) (finding payments to employee

benefit trust funds required by the Coal Industry Retiree Health Benefit Act of 1992 are taxes

entitled to administrative priority).

The Bankruptcy Code provides the framework for determining whether a claim to the

bankruptcy estate, defined as a right to payment, 11 U.S.C. 101(5)(A), is an administrative

expense, 11 U.S.C. 503(b)(1)(A). Chateaugay, 53 F.3d at 497. The existence of a right to

payment is governed by non-bankruptcy law, while the timing of when the claim arose is

governed by the Bankruptcy Code. Id.; Riverwood Intl Corp. v. Olin Corp. (In re Manville

Forest Prods. Corp.), 225 B.R. 862, 866 (Bankr. S.D.N.Y. 1998). ERISA, on the other hand, is a

comprehensive and reticulated statute that includes withdrawal liability rules specifically

designed to ensure that employees and their beneficiaries would not be deprived of anticipated



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retirement benefits, and to discourage voluntary withdrawals and curtail . . . incentives to flee

the plan. Connolly v. Pension Benefit Guar. Corp., 475 U.S. 211, 214 & 217 (1986). These two

statutes must be applied equally to determine the amount of the Pension Funds administrative

claim.

A. The calculation of the Pension Funds administrative claim must take intoaccount the Pension Funds status as a defined benefit plan under ERISA.

The method of calculating the Pension Funds administrative claim for withdrawal

liability must recognize the Pension Funds status as a multiemployer defined benefit plan under

ERISA Sections 3(37) and (35), 29 U.S.C. 1002(35), (37). However, the Reorganized

Debtors proposed method for calculating the Pension Funds administrative claim, which

compares only the benefits accrued by Debtors employees post-petition with Debtors post-

petition contributions (Amended Declaration of Darren French, Doc. No. 4119 (French Decl.)

6), completely disregards the structure and operation of a defined benefit plan.

Unlike an individual account plan or defined contribution plan (such as a 401(k)

plan), which provides each participant with benefits basedsolely upon the amount contributed

to the participants individual account, ERISA Section 3(34); 29 U.S.C. 1002(34), a

multiemployer defined benefit plan creates a framework in which the contributions of all the

participating employers are placed in a single pooled trust, for the benefit of all participants and

beneficiaries of the plan. See ERISA Sections 302 and 304; 29 U.S.C. 1082 and 1084;

Concrete Pipe & Prods. v. Constr. Laborers Pension Trust, 508 U.S. 602, 605-07 (1993). See

also ERISA Section 3(35); 29 U.S.C. 1002, (35) (defining defined benefit plan); Hughes

Aircraft Co. v. Jacobson, 525 U.S. 432, 439 (1999) ([T]he employer typically bears the entire

investment risk and . . . must cover any underfunding as the result of a shortfall that may occur



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from the plans investments.). Therefore, employers participating in such a fund share the risks

associated with pooling the pension funds assets.

As the Supreme Court explained in a case involving withdrawal liability owed to a

multiemployer defined benefit pension fund, depending on the future employment of Concrete

Pipes former employees, the withdrawal liability assessed against Concrete Pipe may amount to

more (or less) than the share of the Plans liability strictly attributable to employment of covered

workers at Concrete Pipe. But this possibility was exactly what Concrete Pipe accepted when it

joined the Plan. Concrete Pipe, 508 U.S. at 574-75. See also Marcal, 650 F.3d at 318

(Although Marcal LLC paints the amount of withdrawal liability it owes as wholly subject to

the whims of the market and actuarial assumptions, it ignores the fact that pursuant to Marcals

agreement to provide a defined benefit, it assumed those risks with open eyes.).

Similarly, when A&P, though its Super Fresh affiliate, entered into a series of collective

bargaining agreements with the United Food and Commercial Workers Union, Local 27

(CBAs), obligating it to contribute to the Pension Fund, and when A&P continued its

participation in the Pension Fund under one or more such CBAs after its bankruptcy petition

date, A&P was, as the Supreme Court put it, accepting that its pre-petition and post-petition

withdrawal liability obligation might amount to more (or less) than the share of the [Pension

Funds] liability strictly attributable to employment of covered workers at its Super Fresh

stores. Concrete Pipe, 508 U.S. at 574-75. As such, the Court must calculate the Pension Funds

administrative claim for post-petition withdrawal liability using a method that reflects this

shared liability feature of a multiemployer defined benefit pension fund.



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B. The calculation of the Pension Funds administrative claim must take intoaccount the fact that, by its participation in a multiemployer defined benefitpension fund, A&P promised to help fund a portion of all the benefitspayable under the Pension Fund, not just the benefits payable to its ownemployees.

In order for a multiemployer defined benefit pension plan such as the Pension Fund to

comply with the minimum funding requirements established under Part 3 of ERISA, all of its

contributing employers, in the aggregate, must contribute to the fund in an amount necessary to

ensure that the fund does not have an accumulated funding deficiency. ERISA Section

302(a)(2)(C); 29 U.S.C. 1082(a)(2)(C). An accumulated funding deficiency will occur if all of

the charges to the multiemployer defined benefit pension plans pooled account exceed the

credits to that account. ERISA Sections 304(a) and (b), 29 U.S.C. 1084(a) and (b). Further, if a

fund experiences an accumulated funding deficiency, all of its participating employers share the

responsibility of making the additional contributions necessary to cure the deficiency, or risk the

imposition of excise taxes on every participating employer. ERISA Section 302(a)-(c), 29 U.S.C.

1082(a)-(c); Gastronomical Workers Union Local 610 & Metro. Hotel Assn Pension Fund v.

Dorado Beach Hotel Corp., 617 F.3d 54, 58-60 (1st Cir. 2010).

By statute, each of the Pension Funds participating employers is required to contribute to

the Fund at a rate that is sufficient, when combined with the contribution rates of all the Funds

other participating employers, to prevent the Fund from incurring a minimum funding deficiency

and to pay the benefits of all vested participants and beneficiaries; not at a rate designed to cover

the benefits earned by a single employers own employees. This is the cost to an employer of

participating in a multiemployer defined benefit pension plan.

It is within this statutory framework of shared liability that participating employers must

contribute to the Pension Fund, and withdrawn employers must pay withdrawal liability to the

Pension Fund. There is no precedent or justification for excusing the Reorganized Debtors from



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this statutorily mandated shared responsibility in the context of calculating an administrative

claim for withdrawal liability.

As recognized by the Second Circuit inMcFarlins, when an employer participates in a

defined benefit plan, the plan, and, indirectly, each participating employer promise[s] to all

participating employees (including those employed by others) benefits based on projections of

future employer contributions.McFarlins, 789 F.2d at 102. Thus, when A&P entered into each

of the CBAs, it promised to help fund the pension benefits of all the Pension Funds participants

and beneficiaries, not just its own. It makes perfect sense, therefore, that A&Ps withdrawal

liability to the Pension Fund, as applicable to both the pre-petition period and the post-petition

period, reflects its proportionate share of the entire Funds unfunded vested benefits that

otherwise would prevent the employer from fulfilling its promise to provide a specific

retirement benefit, a promise which is made in exchange for the employees work. Marcal, 650

F.3d at 318.

1. ERISA prohibits the Reorganized Debtors from defining the scope ofA&Ps post-petition withdrawal liability obligation solely based on thepost-petition benefit accruals of A&Ps own employees.

A&Ps expert, Darren French, openly admitted in his deposition testimony that no

method of calculating withdrawal liability under ERISA permits a participating employer to only

pay for the unfunded vested benefits of its own employees. (Deposition of Darren French

(French Dep.) 25:8-20, 30:25-31:25, 34:2-17.) See ERISA Section 4211, 29 U.S.C. 1391.

This is because, as stated above, all employer contributions to a multiemployer defined benefit

plan are pooled into a single trust for the benefit of all participants and dependents. The

Reorganized Debtors suggestion that the Pension Funds administrative claim for withdrawal

liability be calculated solely on the basis of the benefits accrued by A&Ps participating



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employees during the post-petition period directly conflicts with the very statute under which

their withdrawal liability obligation arises.

Further, withdrawal liability is not the only obligation under a multiemployer defined

benefit pension plan to be calculated based on the liabilities of the plan as a whole. The

contribution rates applicable to A&P under its CBAs also took into account the need for each

participating employer to help pay for the Pension Funds past and future liabilities. See ERISA

Sections 302(a)-(c), 29 U.S.C. 1082(a)-(c). The Reorganized Debtors paid the Funds full

administrative claim for delinquent contributions in January, 2012, without any argument that

they only were obligated to pay in full that portion of the delinquent contributions directly

attributable to the benefits accrued by A&Ps employees post-petition. In doing so, the

Reorganized Debtors effectively agreed that the Fund had a valid administrative claim for

contributions that encompassed the totality of A&Ps pooled funding obligations, not just a

funding obligation relating to the work performed by its own employees during the post-petition

period. Now, in the context of the Funds administrative claim for post-petition withdrawal

liability, the Reorganized Debtors have changed their position without explanation. Instead, they

are attempting to shirk their statutorily imposed duty to pay withdrawal liability, which is based

on the pooled nature of the Pension Funds assets, by arguing that the Court should dissect

A&Ps post-petition contribution obligation to the Fund to account for only a portion of the

contributions that relates to how the Funds administrative claim for withdrawal liability is

determined.

There is no precedent for the Reorganized Debtors attempt to manipulate an

administrative claim in such fashion. To the contrary, when assigning administrative priority to

delinquent contribution claims, such as the Pension Funds claim described above, courts have

established a different precedent by granting administrative priority to more than just the



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delinquent contributions accrued. Rather, such administrative claims also include the related

interest, liquidated damages, and attorneys fees and costs mandated by ERISA 502(g)(2), 29

U.S.C. 1145(g)(2), even though these amounts are not directly attributable to the employees

post-petition work and instead resulted from the employers failure to timely remit its

contributions. See, e.g., In re World Sales, 183 B.R. 872, 878 (B.A.P. 9th Cir. 1995) (concluding

that an ERISA benefit fund was entitled to recover post-petition delinquent contributions,

interest, liquidated damages, and attorneys fees as administrative expenses); In re M & S

Grading, Inc., No. 02-81632, 2009 Bankr. LEXIS 2021, at **10-11 (Bankr. D.Neb. July 27,

2009) (granting an ERISA health and welfare plans application for payment of delinquent

contributions and reasonable attorneys fees as administrative expenses); In re Anything Elec.

Contrs. Co., No. 96-10751, 2005 Bankr. LEXIS 3447, at *19 (Bankr. N.D.N.Y. Jan. 18, 2005)

(holding that an ERISA health and welfare fund was entitled to recover, as administrative

expenses, post-petition delinquent contributions, interest, liquidated damages, and attorneys fees

pursuant to the collective bargaining agreement).

Courts evaluating administrative claims for delinquent contributions have not been

willing to dissect a participating employers statutorily imposed post-petition obligation to

contribute to a defined benefit pension fund, thus enabling the employer to escape its duty to the

funds participants and beneficiaries. Likewise, this Court cannot allow the Reorganized Debtors

to evade the statutory commitments that A&P knowingly made to the Pension Fund and its

participants and beneficiaries during the post-petition period. A&P made an informed decision to

continue participating under the Fund for 385 post-petition days, and thus A&P must be

compelled to fulfill its statutory obligations for that time period.



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2. The Reorganized Debtors post-petition withdrawal liabilityobligation to the Pension Fund must be based on its proportionateshare of the entire Pension Funds unfunded liabilities.

Just as a participating employer must pay contributions to a multiemployer defined

benefit plan based on the pooled nature of the plan, a withdrawing employer must pay

withdrawal liability when it leaves the plan based on the same concept. Withdrawal liability

under ERISA is a necessary product of the pooled assets and liabilities structure of a

multiemployer defined benefit pension plan, much like an insurance scheme in which a

rational employer hopes that its employees will vest at a rate above the average for all

contributing employers [b]ut the rational employer also appreciates the foreseeable risk that

circumstances may produce the opposite result. Concrete Pipe, 508 U.S. at 574-75. Since the

MPPAA spreads the unfunded vested liability among employers in approximately the same

manner that the cost would have been spread if all of the employers participating at the time of

withdrawal had seen the venture through, the withdrawal liability is consistent with the risks

assumed on joining a plan (however inconsistent that liability may be with the employers

hopes).Id. at 575.

Inherent in the concept of withdrawal liability is the element of fairness. Withdrawal

liability directly depends on the relationship between the employer and the plan to which it had

made contributions. Connolly, 475 U.S. at 225. If A&P historically paid a smaller share of the

total contributions received by the Pension Fund, then it would owe a smaller share of the

Pension Funds unfunded vested benefits. And if the Pension Fund was fully funded and thus had

the assets it needed to pay all promised benefits to its vested participants and beneficiaries upon

retirement, then A&Ps withdrawal liability would be $0. See Artistic Carton, 971 F.2d at 1350

(When a plan is terminated, no employer pays anything extra so long as the fund has the assets



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to meet vested obligations.). The law simply requires that A&P pay in full the post-petition

portion of its share of the Pension Funds underfunding.

When A&P intentionally decided to continue participating in the Pension Fund after its

bankruptcy petition date, it understood that, in exchange for the continued service of its

participating employees, the Reorganized Debtors would continue to assume the risks inherent in

participating in a multiemployer pension benefit plan such as the Pension Fund risks based not

just on the Reorganized Debtors obligations to A&Ps own employees, but on their obligations

to all participants and beneficiaries under the Fund. The Reorganized Debtors knew that A&Ps

continued participation in the Pension Fund required that it continue to pay contributions based

on the pooled nature of the Pension Fund and could materially impact their post-petition liability

to the Pension Fund. But they choose to participate anyway. They cannot now reap the benefits

of A&Ps post-petition participation in the Pension Fund without paying the cost of such

participation. As the Second Circuit noted inIn re Chateaugay Corp., an entity that benefited

directly from the effect of [a] promise on the availability and quality of [union] labor . . . cannot

now maintain that Congress acted arbitrarily in assigning to [it] a proportional share of the future

cost of fulfilling that promise. 53 F.3d at 491.

III. The $7,219,172 post-petition portion of the Pension Funds withdrawal liabilityclaim is entitled to priority as an administrative expense.

A. The Pension Funds administrative claim calculation complies with ERISAbecause it apportions A&Ps total withdrawal liability obligation between thepre- and post-petition time periods.

The Pension Funds administrative claim calculation method, which is described in the

Declaration of Kevin Woodrich and summarized below, is based on the amount of A&Ps total

withdrawal liability to the Pension Fund attributable to the post-petition calculation period.

(For purposes of the Reorganized Debtors withdrawal liability obligation to the Fund, the post-



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petition calculation period is December 12, 2010 through December 31, 2011, the period

beginning with the Reorganized Debtors bankruptcy petition date and ending with the last day

of the Pension Fund Plan Year before A&Ps withdrawal from the Pension Fund.) This method is

supported by In re Cott Corp., a case in which the court found that it was only sensible to

allow administrative priority for the portion of pension funds total claim for withdrawal liability,

as calculated according to ERISA, that was incurred during the post-petition time period. 47 B.R.

487, at 494-95 (Bankr. D. Conn. 1984). (Woodrich Dep. at 19:24-21:3.)

The Pension Fund calculated A&Ps total withdrawal liability obligation to the Fund

using the presumptive method set forth in ERISA Section 4211(b)(1), 29 U.S.C. 1391(b)(1)

(Section 4211), which is the method that has been adopted by the Pension Funds Trustees and

is reflected in the Pension Funds written Withdrawal Liability Rules. Under the presumptive

method, A&Ps withdrawal liability is based on its allocated portion of the change in the Pension

Funds unfunded vested benefits for each of the 20 Plan Years (annual pools) prior to the year

of withdrawal, and each annual pool is based on a 10-year contribution history. Using this

method, A&Ps total withdrawal liability obligation to the Pension Fund is $77,420,079.

(Woodrich Decl. 10-14.)

The administrative portion of the Reorganized Debtors total withdrawal liability

obligation must be based on A&Ps share of the unfunded vested benefits attributable to the post-

petition calculation period. Applying the presumptive method to the post-petition calculation

period, A&Ps allocated share of the 2010 annual pool, pro-rated for 20 post-petition days in

2010, is $204,158, and A&Ps allocated share of the 2011 annual pool, all of which was post-

petition, is $7,015,014. (Woodrich Decl. 14.) Therefore, the administrative expense portion of

the Reorganized Debtors total withdrawal liability obligation is $7,219,172. (Woodrich Decl.

14.)



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B. The Pension Funds administrative claim calculation complies with theBankruptcy Code because it meets the criteria for administrative priorityunder the Bankruptcy Code.

An administrative expense is defined in the Bankruptcy Code as the actual, necessary

costs and expenses of preserving the estate, including wages, salaries, and commissions for

services rendered after the commencement of the bankruptcy case. See 11 U.S.C. 503(b)(1)(A).

By applying administrative priority to expenses incurred post-petition, the Bankruptcy Code

advances its goal of rehabilitating the debtor by encouraging third parties to supply goods and

services on credit to the estate and providing fair treatment to those who provide goods or

services, on a post-petition basis.Adelphia Bus. Sols., 296 B.R. at 663-64.

In the Second Circuit, an administrative claim must arise[] out of a transaction between

the creditor and the debtor-in-possession, but only to the extent that the consideration

supporting the claimants right to payment was both supplied to and beneficial to the debtor-in-

possession in the operation of the business.McFarlins, 789 F.2d at 101. The Pension Funds

administrative claim reflects the actual, necessary costs of preserving the Reorganized Debtors

estate, and the consideration in support of its claim was beneficial to the Reorganized Debtors

because the post-petition services provided by A&Ps employees pursuant to the CBAs, in

exchange for A&Ps continued participation in the Pension Fund, enabled A&P to continue

operations at the stores where those employees worked and thereby generate revenue to assist in

financing its reorganization.

1. The Reorganized Debtors received consideration supporting the

Pension Funds right to an administrative claim of $7,219,172.

Consideration exists generally where (1) the debtor-in-possession induces the creditor to

perform postpetition, or (2) the creditor performs under an executory contract prior to rejection.

In re Patient Educ. Media, 221 B.R. 97, 101 (Bankr. S.D.N.Y. 1998) (emphasis added). A



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debtor induces a creditor to perform when it elects to continue to receive benefits from the

other party to an executory contract pending a decision to assume or reject the contract.In re

Old Carco LLC, 424 B.R. 650, 656-57 (Bankr. S.D.N.Y. 2010). Here, both prongs of the test

have been satisfied.

Under the first prong, A&P induced its participating employees to continue their

employment with A&P and induced the Pension Fund to continue its coverage of these

participating employees post-petition by continuing to operate the stores that employed the

participating employees and by continuing to pay contributions to the Pension Fund under the

CBA, until its withdrawal from the Fund. Under the second prong, A&P received the benefit of

its employees continued performance of their job duties during the post-petition period.

As the Third Circuit has stated, [b]ecause withdrawal liability ensures that there are

enough plan assets to provide promised benefits, it is provided in consideration for the

employees willingness to continue to work.Marcal, 650 F.3d at 319. Further, [i]f employees

work post-petition, contractual and statutory rights like withdrawal liability are properly

characterized as post-petition obligations to the extent they accrue after a bankruptcy filing.

Pulaski, 57 B.R. at 508 n.11.

The Pension Fund clearly satisfies the Bankruptcy Codes requirement that the

Reorganized Debtors received consideration in exchange for the administrative withdrawal

liability claim they incurred.

2. The Reorganized Debtors benefited from the consideration theyreceived during the post-petition period.

In the context of establishing an administrative claim, the benefit analysis focuses on

whether an expense was necessary to preserve the estate. In re Refco, Inc., No. 07-4784, 2008

U.S. Dist. LEXIS 2484, at *23 n.11 (S.D.N.Y. Jan. 14, 2008). The terms actual and



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necessary are not defined in 11 U.S.C. 503(b), but, in the course of deciding cases under the

Bankruptcy Code, courts have provided guidance as their meaning. See Reading Co. v. Brown,

391 U.S. 471, 476-77 (1968). [T]here are other policies also involved in section 503(b) that

have implications broader than strictly rehabilitating the business or preserving the estates

assets.In re NP Mining, 963 F2d 1449, 1454 (11th Cir. 1992) (citingReading, 391 U.S. at 484-

85). [C]osts that form an integral and essential element of the continuation of the business are

necessary expenses even though priority is not necessary to the continuation of the business.

Reading, 391 U.S. at 484 (referring to taxes as an example). Withdrawal liability is one such

cost.

Applying this framework, A&P clearly benefited from the post-petition services provided

by its employees under the CBAs because the employees services allowed A&P to continue

operating certain stores during the post-petition period, thus increasing A&Ps revenue. By virtue

of A&Ps deliberate decision to continue operating these stores during the post-petition period,

even though it closed a significant number of other stores, it is clear that A&P viewed the

continued operation of these stores, and the related costs, as an integral and essential element

of its continuing business. Id. A&Ps employees, in turn, provided this continuing service based

on the understanding that A&P would uphold its obligation to help ensure that the Pension

Funds participants and beneficiaries would receive a pension benefit upon retirement.

Allowing the Pension Funds administrative claim for the post-petition portion of the

Reorganized Debtors withdrawal liability obligation, as determined under the withdrawal

liability calculation method established by ERISA and adopted by the Pension Funds Board of

Trustees, also comports with the Bankruptcy Codes goal of enabling A&P to emerge from

bankruptcy as a reorganized entity: The post-petition work of the employees supplied A&P with

continuing revenue from the still operating stores.



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On the other hand, A&Ps administrative claim calculation method, as described below,

would discourage third parties from doing business with a debtor-in-possession because the

debtor would be able to receive valuable consideration from a creditor without the obligation to

fully compensate the creditor for providing the services.

C. A&Ps method of calculating the Pension Funds administrative claim doesnot comply with ERISA and instead attempts to redefine A&Ps post-petitionwithdrawal liability obligation in a way that has no relationship to A&Psactual withdrawal liability under ERISA.

The Reorganized Debtors method for calculating the Pension Funds administrative

expense claim, as described in the Amended Declaration of its expert witness, is simply to

subtract the contributions A&P paid the Pension Fund for the post-petition period from the

pension benefits its employees accrued under the Pension Fund during the same period. (French

Decl. 6.) In support of their calculation, the Reorganized Debtors rely on a single federal

district court case from Ohio, In re Sunarhauserman, 184 B.R. 279 (N.D. Ohio 1995), and an

expert witness who describes, but is not testifying in favor of, their calculation method. (French

Decl. 5.) In fact, the Reorganized Debtors expert admitted during his deposition that he had

never used, nor even heard of, the calculation method in Sunarhauserman before the

Reorganized Debtors bankruptcy counsel described it to him for the purpose of preparing his

Declaration (French Dep. 49:21-50:24). He also stated that, on the two or three occasions during

which he previously calculated an administrative claim for withdrawal liability, he used one of

the alternative calculation methods described in his Declaration (French Decl. 18-20; French

Dep. 17:5-25). And those two alternatives are both completely inconsistent with the calculation

method the Reorganized Debtors urge the Court to apply here.

Using the Reorganized Debtors calculation method, their expert determined that A&Ps

pro-rated contributions during the post-petition portion of 2010 were estimated to be $130,701;



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its contributions during 2011, all of which was post-petition, were $1,815,940; and its

contributions during the post-petition portion of 2012 were estimated to be $151,328, resulting in

estimated total post-petition contributions of $2,097,969. (French Decl. 8-9.) He then estimated

that the post-petition vested benefits accrued under the Pension Fund by A&Ps employees were

worth $494,604. Applying these numbers to A&Ps calculation method, the $494,604 in benefits

accrued post-petition, less A&Ps post-petition contributions of $2,097,969, yields $1,603,365.

Thus, while the Reorganized Debtors contend that the Pension Funds administrative claim

should be $0 (French Decl. 7, 10), a literal application of their calculation method results in a

negative number, indicating how silly a method it is.

As evidenced by the absurd result of following the Reorganized Debtors calculation

method through to its literal conclusion, this court-created method is in clear conflict with

ERISA. In Sunarhauserman, the court determined, sua sponte, that it must limit the

administrative priority component of the pension funds claims to amounts that bear a direct

relation to the debtors post-petition operations. Id. at 282. Therefore, the courts calculation

of the funds administrative claim for withdrawal liability consisted solely of the benefits earned

by the debtors employees during the actual time period of post-petition operations, less the

contributions paid for hours worked during the same time period; it did not include other factors

that caused underfunding, such as an unexpected decrease in contributions during the plan year

before the debtor withdrew.Id. at 282-83. This case was wrongly decided for multiple reasons.

First, under the Sunarhauserman method, the Reorganized Debtors would be responsible

for paying post-petition withdrawal liability to the Pension Fund only to the extent that such

liability directly relates to the unfunded vested benefits earned by A&Ps employees during the

post-petition period. As the Reorganized Debtors own expert testified, none of ERISAs

approved methods for calculating withdrawal liability, including the method adopted by the



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Pension Fund, permit a withdrawn employer to pay withdrawal liability based solely on the

unfunded vested benefits attributable to its own employees. (French Dep. 25:8-20, 30:25-31,

34:2-17). Specifically, their expert agreed that having liability only for an employers own

employees on unfunded vested benefits . . . is certainly inconsistent with the withdrawal liability

computation adopted and utilized by [the Pension Fund]. (French Dep. 54:14-21.)

Second, the Sunarhauserman calculation method advocated by the Reorganized Debtors

effectively requires the Pension Fund to dedicate the Reorganized Debtors post-petition

contributions solely to the payment of benefits accrued by A&Ps employees during the post-

petition time period. However, under a multiemployer defined benefit plan such as the Pension

Fund, the contributions of all participating employers are combined for the purpose of paying the

vested benefits of all participants and beneficiaries under the Fund.Hughes, 525 U.S. at 439-40.

See also ERISA Sections 302 and 304, 29 U.S.C. 1082 and 1084. Notably, the Reorganized

Debtors own expert agrees with the Pension Fund on this point, acknowledging during his

deposition that ERISA does not allow either an employer or a fund to earmark the employers

contributions to the fund for a specific purpose or time period. (French Dep. 57:15-58:8.)

Third, the Sunarhauserman calculation method requires that a withdrawn employers

previously made contributions to a multiemployer defined benefit pension fund be subtracted

from the withdrawal liability the employer otherwise owes, to determine the amount the

employer actually must pay to the fund. In other words, there is absolutely no support under

ERISA for the proposition that, after the Pension Fund has calculated A&Ps withdrawal liability

obligation, it must then subtract from that obligation the contributions A&P previously made to

the Fund during the post-petition period. The reason for this lack of authority is clear, as such a

process is antithetical to the concept of withdrawal liability, which is designed to make up for the



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funding shortfall that exists after taking into account the contributions that employers already

have paid into the Fund. Connolly, 475 U.S. at 216.

Finally, ifSunarhauserman is correct, presumably its reasoning would not only apply to

withdrawal liability, but also to post-petition contributions made to a multiemployer plan. But

there is no precedent for an employer making contributions to a defined benefit multiemployer

plan solely to fund its own employees post-petition benefits. This would be inconsistent with the

collectively bargained contribution rate, and the funding rules under ERISA and the Internal

Revenue Code, which require (as with withdrawal liability) that the funding obligations be

calculated on a pooled basis. A plan could not accept contributions determined on a non-pooled

basis.

For the foregoing reasons, this Court must reject the Reorganized Debtors proposed

method for calculating the Pension Funds administrative claim for withdrawal liability.

Conclusion

While the Pension Fund and A&P take markedly different approaches to calculating the

Pension Funds administrative claim for withdrawal liability, only the Pension Funds approach

is consistent both with the Bankruptcy Code and with ERISA. To give effect to both federal

statutes implicated in this dispute, as it is required to do, the Court must choose the Pension

Funds method for calculating its administrative expense claim. For the reasons described herein,

the Pension Fund respectfully requests that the Court grant its Motion and order the Reorganized

Debtors to pay to the Pension Fund an administrative claim of $7,219,172.



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Dated: June 13, 2013Washington D.C.

/s/ Barry S. Slevin

SLEVIN & HART, P.C.1625 Massachusetts Ave., NW, Suite 450

Washington, DC 20036(202) 797-8700Barry S. Slevin, Esq.Jeffrey S. Swyers, Esq.Laura Offenbacher Aradi, Esq.

Dated: June 13, 2013New York, New York /s/ Julie D. Dyas

HALPERIN BATTAGLIA RAICHT, LLP555 Madison Avenue, 9th FloorNew York, NY 10022

(212) 765-9100Alan D. Halperin, Esq.Donna H. Lieberman, Esq.Julie D. Dyas, Esq.

Counsel to the Food Employers Labor Relations

Association and United Food and Commercial

Workers Pension Fund

CERTIFICATE OF SERVICE

I certify that on this 13th day of June, 2013, I served the foregoing on counsel of recordvia email as set forth below:

Michael B. Slade, Esq.Kristina Alexander, Esq.Kirkland & Ellis LLP300 North LaSalleChicago, IL [email protected]@kirkland.com

Counsel to Reorganized Debtors

/s/ Julie D. Dyas

Julie D. Dyas

20012735v1


Great Atlantic Withdrawal Liability Union Brief

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Transcript of Great Atlantic Withdrawal Liability Union Brief