In Re Marcal Paper Mills, Inc.

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
________

No. 09-4574
_________

In re: MARCAL PAPER MILLS, INC.,
Appellant
________

On Appeal from the United States District Court
for the District of New Jersey
(D.C. No. 2-09-cv-01863)
District Judge: Honorable Stanley R. Chesler
_______

Argued February 16, 2011

Before: SLOVITER and HARDIMAN, Circuit Judges
and JONES,* District Judge

(Filed June 16, 2011)
______

Gerald H. Gline, Esq.
Cole, Schotz, Meisel, Forman & Leonard
25 Main Street-Court Plaza North
P.O. Box 800
Hackensack, NJ 07601

*
Hon. C. Darnell Jones, II, District Judge for the
United States District Court for the Eastern District of
Pennsylvania, sitting by designation.
James M. Hirschhorn , Esq. (Argued)
Andrew H. Sherman, Esq.
Sills, Cummis & Gross
One Riverfront Plaza
Newark, NJ 07102

Attorneys for Appellant

David Grossman, Esq.
Paul A. Montalbano, Esq. (Argued)
Cohen, Leder, Montalbano & Grossman
1700 Galloping Hill Road
Kenilworth, NJ 07033

Attorneys for Appellee

_____________

OPINION OF THE COURT
_____________

SLOVITER, Circuit Judge.

This appeal, which arises from a bankruptcy
proceeding, presents only one issue, but it is an issue of first
impression in this Circuit and requires interpretation and
reconciliation of two important and complex federal statutory
schemes and their underlying policies. Specifically, it
requires us to decide whether under the Employee Retirement
Income Security Act (“ERISA”), as amended by the
Multiemployer Pension Plan Amendments Act (“MPPAA”),
the portion of withdrawal liability that is attributable to the
post-petition time period constitutes an administrative
expense entitled to priority under the Bankruptcy Code. The
District Court, overturning the Bankruptcy Court decision,
held that it does and that the post-petition portion of the
multiemployer fund‟s withdrawal liability claim against
debtor Marcal Paper Mills, Inc. was entitled to priority.
Marcal Paper Mills, LLC (hereafter “Marcal LLC”), who
purchased the assets of the debtor Marcal Paper Mills, Inc.
(hereafter “Marcal”) and assumed liability for this claim,
2
appeals, arguing that the entire claim for withdrawal liability
should be classified as a general unsecured claim.

I.

Marcal, which manufactured paper products, operated
a fleet of trucks to distribute its products. The truck drivers
employed by Marcal were members of Teamsters Union
Local 560. Local 560 was the collective bargaining
representative for those employees and, over the years,
entered into a series of collective bargaining agreements
(“CBAs”) with Marcal. As part of the CBAs, Marcal was
required to participate in the Trucking Employees of North
Jersey Welfare/Pension Fund (“TENJ Pension Fund” or
“Fund”) — a multiemployer defined benefit pension fund.

On November 30, 2006, Marcal filed a Chapter 11
bankruptcy petition and Marcal operated as a debtor-in-
possession (“DIP”) from that date, continuing to employ
members of Local 560. The CBA governing the employees‟
work and requiring Marcal‟s participation in the TENJ
Pension Fund did not expire until September 15, 2007.
Aware that the CBA was set to expire, on August 16, 2007,
DIP Marcal and Local 560 entered into a Memorandum of
Understanding continuing the terms of the CBA until a new
contract could be negotiated. The parties were never able to
negotiate a new contract. Nevertheless, because the CBA and
pension plan were continued and DIP Marcal continued to
employ covered employees, those employees accrued pension
credits and the corresponding benefits. In addition, under the
continued-CBA DIP Marcal was required to satisfy its TENJ
Pension Fund obligations. One of those obligations was that
DIP Marcal continue to make contributions to the TENJ
Pension Fund on behalf of covered employees. DIP Marcal
made all such contributions from November 30, 2006, the
date of its Chapter 11 petition, until May 30, 2008, when DIP
Marcal‟s assets were sold to Marcal Paper Mills, LLC. From
that date, Marcal LLC ceased to employ Local 560 truck
drivers. Accordingly, there is no dispute that Marcal LLC
had no obligation to make contributions or provide benefits
associated with work after May 30, 2008.
3
 As a consequence of DIP Marcal‟s cessation and the
fact that Marcal LLC did not employ Local 560 drivers, the
TENJ Pension Fund determined that DIP Marcal had made a
“complete withdrawal” from the pension fund within the
meaning of ERISA, as amended by the MPPAA. The TENJ
Pension Fund assessed Marcal with $5,890,128 in total
withdrawal liability. On July 29, 2008, the TENJ Pension
Fund filed a claim in Marcal‟s bankruptcy proceeding for the
entire amount of withdrawal liability as a post-petition
administrative claim under 11 U.S.C. § 503(b) of the
Bankruptcy Code. Marcal objected to the TENJ Pension
Fund‟s claim that the withdrawal liability be classified as an
administrative expense and filed a motion to reclassify it as a
general unsecured claim. In response, the TENJ Pension
Fund altered its claim and only sought administrative priority
for that portion of the withdrawal liability attributable to post-
petition services provided by Local 560 employees to DIP
Marcal.

Notwithstanding, the Bankruptcy Court rejected TENJ
Pension Fund‟s claim and reclassified the entire withdrawal
liability claim as a general unsecured claim. The District
Court subsequently reversed and held that the portion of the
withdrawal liability attributable to the post-petition period
was entitled to priority. It remanded the matter to the
Bankruptcy Court to calculate how the claim should be
apportioned between pre- and post-petition periods. Trucking
Emps. of N. Jersey Welfare Fund, Inc., v. Marcal Paper Mills,
Inc., 2009 WL 3681897, at *8 (D.N.J. Nov. 2, 2009). Marcal
LLC appeals.

II.

The District Court had jurisdiction over the appeal of
the Bankruptcy Court‟s classification of the claim pursuant to
28 U.S.C. § 158(a)(1) and 28 U.S.C. § 1334(a). Under 28
U.S.C. § 158(d)(1), we have jurisdiction of “appeals from all
final decisions, judgments, orders, and decrees entered” by a
district court pursuant to its authority to hear appeals from
final judgments, orders, and decrees entered by a bankruptcy
4
court. We have held that because of the unique nature of
bankruptcy cases, finality under § 158(d)(1) should be viewed
“in a more pragmatic and less technical way” than it would
under 28 U.S.C. § 1291. F/S Airlease II, Inc. v. Simon (In re
F/S Airlease II, Inc.), 844 F.2d 99, 103 (3d Cir. 1988).

To determine whether a decision is final, we consider
three factors: (1) “the impact of the matter on the assets of the
bankruptcy estate,” (2) “the preclusive effect of a decision on
the merits,” and (3) “whether the interests of judicial
economy will be furthered.” Id. at 104. Consistent with
Supreme Court precedent, we hold that the District Court‟s
decision classifying the post-petition portion of withdrawal
liability as an administrative expense was final, and that
judicial economy is served by resolving this issue now, rather
than after the estate has been conclusively divided. See
Howard Delivery Serv. v. Zurich Am. Ins. Co., 547 U.S. 651,
657 n.3 (2006) (decision regarding the priority of a claim is
final and appealable); see also In re Saco Local Dev. Corp.,
711 F.2d 441, 445-46 (1st Cir. 1983) (same).

To the extent that this appeal involves a question of
law regarding whether withdrawal liability, or at least a
portion thereof, can qualify as an administrative expense
under the Bankruptcy Code, our review is de novo.
Schlumberger Res. Mgmt. Servs., Inc. v. CellNet Data Sys.,
Inc., 327 F.3d 242, 244 (3d Cir. 2003).

III.

As mentioned, the question in this case is whether
withdrawal liability, as defined by ERISA, as amended by the
MPPAA, should be apportioned between pre- and post-
petition periods and, if so, whether the post-petition portion
qualifies as an administrative expense as defined by the
Bankruptcy Code. Accordingly, we begin with the language
of the statutes.

Title 11 U.S.C. § 507(a)(2) of the Bankruptcy Code
provides that administrative expenses allowed under § 503(b)
are entitled to priority over the claims of general unsecured
5
creditors. Section 503(b)(1)(A) defines administrative
expenses as “the actual, necessary costs and expenses of
preserving the estate including . . . wages, salaries, and
commissions for services rendered after the commencement
of the case [i.e. after the filing of the bankruptcy petition].”
Interpreting this provision, we have explained that in order to
qualify for administrative priority, an expense “must arise
from a [post-petition] transaction with the debtor-in-
possession” and the expense “must be beneficial to the
debtor-in-possession in the operation of the business.” In re
O’Brien Envtl. Energy, Inc., 181 F.3d 527, 532-33 (3d Cir.
1999) (quotations and brackets omitted). Pursuant to the
statute‟s terms, the expense must also be actual and
necessary. Id.

These requirements balance two important goals. By
giving priority to those claims that help keep the debtor-in-
possession functioning, “sections 503 and 507 advance the
estate‟s interest in survival above all other financial goals.”
Zagata Fabricators, Inc. v. Superior Air Prods., 893 F.2d
624, 627 (3d Cir. 1990). By limiting priority to those claims
that are actual and necessary, the Code prevents the estate
from being consumed by administrative expenses, and
preserves the estate for the benefit of the creditors. See Pa.
Dep’t of Envtl. Res. v. Tri-State Clinical Labs, Inc., 178 F.3d
685, 690 (3d Cir. 1999) (holding that “Chapter 11 is intended
to rehabilitate the debtor and avoid forfeiture by creditors”)
(quotations and brackets omitted). Consistent with the
objective of preserving the estate for creditors, the burden to
demonstrate that an expense deserves administrative priority
lies with the party asserting such priority, here, the TENJ
Pension Fund. See In re O’Brien, 181 F.3d at 533.

Thus, as applied to this case, the relevant inquiry is
whether any portion of the withdrawal liability owed by
Marcal LLC to the TENJ Pension Fund is a post-petition
expense provided in exchange for a service that was actual
and necessary for the continued operation of DIP Marcal. In
this regard, it is helpful to distinguish between the nature of
withdrawal liability and how withdrawal liability is
calculated. Both shed light on the relevant question.
6
 The MPPAA instituted withdrawal liability in response
to a shortcoming in the original ERISA statute regulating
multiemployer defined benefit pension plans. A defined
benefit plan, such as the TENJ Pension Fund plan, “is a
pension plan under which an employee receives a set monthly
amount upon retirement for his or her life, with the benefit
amount typically based upon the participant‟s wages and
length of service.” In re Schering Plough Corp. ERISA Litig.,
589 F.3d 585, 595 n.8 (3d Cir. 2009). In other words, the
employer has promised the employee a certain pension
benefit. The benefit level is set by the plan trustee based on
the “expected resources” of the plan. Joint Explanation of S.
1076: Multiemployer Pension Plan Amendments Act of 1980,
126 Cong. Rec. S20189, S20191 (July 29, 1980) (“Joint
Explanation”). “The resources of a plan available to pay
those benefits consist of assets held by the plan.” Id. at
S20191. Those assets include, “[f]uture contributions
expected by the plan and income expected to be earned on
plan investments.” Id. Accordingly, in a defined benefit
plan, the employer‟s continuing contributions to the plan are
designed to provide a subsequent benefit to the employee
upon retirement.1

As set forth in the Joint Explanation, even if an
employer has made all of its contributions to date, “[b]ecause
benefit promises may be funded over many years after they
are made, the withdrawing employer may not have made
sufficient contributions to the plan to fund a fair share of the

1
See Marcal‟s Motion to Reclassify the Administrative
Proofs of Claim of the TENJ Pension Fund, App. at 352
(“The CBA required, among other things, that the Debtors
pay certain benefits and make contributions to the
Teamsters Union‟s health, welfare and pension funds,
including the Teamsters Union‟s multiemployer pension
plan.”). We note that the TENJ Pension Plan itself was
not submitted on appeal or contained in the record below.
Nevertheless, there appears to be no dispute regarding the
terms of the plan or that it is a multiemployer defined
benefit plan.
7
cost of those benefit promises.” Id. at S20192. In contrast, a
“defined contribution plan is a retirement plan whereby the
employer, employee, or both make contributions to an
individual‟s account during employment, but with no
guaranteed retirement benefit, and with the ultimate benefit
based exclusively upon the contributions to, and investment
earnings of the plan. The benefit ceases when the account
balance is depleted, regardless of the retiree‟s age or
circumstances.” In re Schering Plough, 589 F.3d at 595 n.8.

As explained in the “General Reasons for the Bill”
section of the Joint Explanation, ERISA, in its original form,
allowed employers to withdraw from defined benefit plans
and escape their obligations to provide benefits, crippling the
plan. “One of the most serious threats to the security of
benefits under a multiemployer plan is an unanticipated
decline in employment covered by the plan. Where this
occurs, the plan is unlikely to have the resources necessary to
provide benefits promised to employees. . . . Under ERISA,
an employer who has paid all required contributions to a
multiemployer [plan] can withdraw from the plan and, if the
plan does not terminate within 5 years after the withdrawal,
the employer will have no further responsibility for any part
of the unfunded liabilities of the plan.” Joint Explanation at
S20191-92.2 Withdrawal liability was implemented to

2
Put even more forcefully by the House Report:
“The current rules for employer liability upon the
withdrawal of the employer are inequitable and
dysfunctional because: (1) employers who withdraw from
a plan early are rewarded, while employers who remain
with a plan are penalized, and (2) there is no provision for
compensation to a multiemployer plan for a withdrawal.”
H.R. Rep. No. 96-869(1), at 60 (1980), reprinted in 1980
U.S.C.C.A.N. 2918, 2928 (“House Report”); see also Trs.
of Amalgamated Ins. Fund v. McFarlin’s, Inc. (In re
McFarlin’s, Inc.), 789 F.2d 98, 102 (2d Cir. 1986) (“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 . . . . The withdrawal of employers allowed
8
alleviate this problem and ensure that employers could not
avoid their obligation to provide a promised benefit by
withdrawing, thereby hurting their employees and the entire
pension fund‟s health.

With an understanding of the purpose of withdrawal
liability and the problem it was designed to repair, we can
examine how it did so. The MPPAA provides that if an
employer withdraws from a multiemployer plan, then the
employer is liable for its proportionate share of the “unfunded
vested benefits.” 29 U.S.C. § 1381(b)(1). Unfunded vested
benefits are “calculated as the difference between the present
value of vested benefits and the current value of the plan‟s
assets.” Pension Benefit Guar. Corp. v. R.A. Gray & Co., 467
U.S. 717, 725 (1984). Section 1391 of the MPPAA provides
various methods for calculating what portion of the plan‟s
underfunding is allocable to a particular employer as its
withdrawal liability. And the plan trustee possesses the
discretion to choose which method of calculation to employ
(although the plan‟s final actuarial calculation may be
challenged by the employer). See Concrete Pipe & Prods. of
Cal., Inc. v. Constr. Laborers Pension Trust, 508 U.S. 602,
609, 611 (1993). Broadly speaking, the Act “requires that a
withdrawing employer continue funding a proportional share
of the plan‟s unfunded benefit obligations.” House Report,
1980 U.S.C.C.A.N. 2918, 2935 (emphasis added).

Section 1391 “extrapolate[s] 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.” In re
McFarlin’s, 789 F.2d at 103. Although the calculation can be
quite “complex . . . [it] is based largely on the withdrawing
employer‟s contribution history over the five . . . years
preceding the withdrawal.” CenTra, Inc. v. Cent. States Se. &
Sw. Areas Pension Fund, 578 F.3d 592, 599-600 (7th Cir.

them to leave plans without fully funding the benefits
vested in, and therefore earned by, their employees up to
the time of the withdrawal.”).
9
2009), cert. denied, 130 S. Ct. 1885 (2010). Indeed, in this
case, both parties agree that a withdrawing employer‟s
proportionate share of the unfunded vested benefits is “based
on [the] contributions [it was obligated to pay] for the 5 years
preceding withdrawal.” Appellant‟s Br. at 21 n.3; see also
Appellee‟s Br. at 20.

To summarize, withdrawal liability is calculated by,
first, determining the plan-wide shortfall between the plan
assets and the vested benefits the plan owes to employees.
Second, once the overall size of the shortfall has been
determined, the withdrawing employer‟s share of that
shortfall is determined by calculating, in essence, the
proportionate share owed to the withdrawing employer‟s
covered employees based on the employer‟s contribution
share over the prior five years.

Based on the above analysis, it is clear that the covered
employees were required to perform work post-petition in
order to keep DIP Marcal in operation, unquestionably
conferring a benefit to the estate. Pursuant to the continued-
CBA and pension plan, Marcal promised to provide pension
benefits in exchange for that post-petition work. The portion
of the withdrawal liability which corresponds to that post-
petition work is owed by Marcal LLC in fulfillment of the
promise it assumed as part of its purchase of Marcal‟s assets
to provide pension benefits in consideration for that necessary
post-petition work. Therefore, the requirements of 11 U.S.C.
§§ 503(b)(1)(A) & 507(a)(2) of the Bankruptcy Code are
satisfied. We agree with the District Court and hold that the
portion of the withdrawal liability attributable to the post-
petition period is entitled to administrative priority.

Marcal LLC advances two principal arguments in
opposition to this conclusion, neither of which is persuasive.
First, it argues that because the amount of its withdrawal
liability will be based on a variety of factors, some of which
have nothing to do with the work performed by the covered
employees, withdrawal liability cannot be considered an
administrative expense. Without question, the existence of
withdrawal liability and its size will depend on how the
10
Fund‟s assets have fared in the market, how much money has
been withdrawn by retired employees, and other actuarial
assumptions. But that does not alter the fact that the amount
owed to the TENJ Pension Fund is based upon Marcal‟s
decision to take advantage of work provided by covered
employees. In turn, the portion of that employee work that
occurred post-petition was wholly dependent upon DIP
Marcal‟s decision to employ covered teamsters while
operating as a debtor-in-possession. It is simply not seemly
for Marcal LLC to disclaim responsibility for the vested
benefits Marcal created by choosing to use covered
employees to perform post-petition work.

The size of the benefit owed to a particular employee
is determined, in part, by the amount of time that employee
worked for Marcal. In re Schering Plough, 589 F.3d at 595
n.8. To the extent that the employees worked for Marcal
post-petition, they continued to accrue new vested benefits
under the CBA and the TENJ Pension Fund plan. The
following is the District Court‟s helpful explanation:

The obligation to make [a withdrawal liability]
payment . . . would not exist but for the insolvent
employer‟s deliberate decision to use the services of
the covered employees pursuant to the terms of
compensation negotiated in the collective bargaining
agreement. Put differently, a portion of the accelerated
pension funding [the withdrawal liability] is premised
on the bargaining unit employees‟ earned credit toward
their future right to collect pension benefits in
consideration of their work for the debtor in
possession. Instead of financing the deferred
compensation through monthly contributions, as it
would do if it continued to participate in the
multiemployer fund, the withdrawing employer is
required to make a lump sum payment to the fund.
Neither this requirement, nor the existence of
insurance provided by the Pension Benefit Guaranty
Corporation for benefits owed to covered employees
by the fund, alter the basic character of the
withdrawing employer‟s debt - that is, incurred in
11
 return for the employees‟ service to the employer post-
petition.

Trucking Emps. of N. Jersey Welfare Fund, Inc., 2009 WL
3681897, at *7.

The Second Circuit in In re McFarlin’s echoes this
conclusion: “An employer‟s withdrawal liability payment . . .
is the means by which the employer funds benefits that his
employees have „earned‟ by their past service and that he
would normally finance through continuing contributions to
his employees‟ pension plan.” 789 F.2d at 104. Accordingly,
to the extent that a portion of the benefits correlate to the
employees‟ post-petition service, the benefit is akin to direct
compensation provided in exchange for post-petition services,
which undisputedly qualifies as an administrative expense.
See Howard Delivery Serv., 547 U.S. at 659 (noting that
employee benefits compliment and/or substitute hourly wage
compensation).

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 Marcal‟s agreement to provide a defined benefit,
it assumed those risks with open eyes. Marcal LLC‟s
continued emphasis on the fact that Marcal had made all
required plan contributions is a red herring; Marcal‟s promise
to its employees was not just to provide contributions, but to
provide a certain benefit. As we have explained, “[u]nfunded
vested benefits [from which withdrawal liability is calculated]
are benefits which are „promised and earned but not yet
funded‟ as of the calculation day. The liability for [unfunded
vested benefits] represents a pre-existing obligation on the
employer‟s part, and is not simply „incurred‟ as of the date of
withdrawal. In other words, the unfunded vested benefit
calculation represents an employer‟s share of the amount
needed for a fund to break even as of the calculation date.”
Huber v. Casablanca Indus., Inc., 916 F.2d 85, 96 (3d Cir.
1990), overruled on other grounds by Milwaukee Brewery
Workers’ Pension Plan v. Jos. Schlitz Brewing Co., 513 U.S.
414 (1995) (internal citation omitted). Put differently,
12
withdrawal liability is intended to make up for any deficiency
in the fund‟s assets—any such deficiency 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 LLC‟s second argument is that withdrawal
liability is not designed to benefit the employees who provide
the post-petition service. Instead, it argues, withdrawal
liability is intended to benefit (1) the other employers within
the TENJ Pension Fund, (2) the Pension Benefit Guaranty
Corporation insurance scheme which may have to make up
any shortfall, and (3) all of the employee-beneficiaries of the
plan, not just those who worked for Marcal. Importantly,
Marcal LLC concedes that withdrawal liability is, at least in
part, designed to benefit the employee-beneficiaries who
worked for Marcal.

Although both the Senate and House explanations for
the MPPAA discuss how withdrawal liability would protect
the other employers and prevent collapse of the plan, the
simple fact is that the plan exists for the benefit of the
employees. The legislative history of the MPPAA
emphasizes that absent withdrawal liability, the employees
are harmed. See, e.g., Joint Explanation at S20191-92 (noting
that when withdrawal occurs, “the plan is unlikely to have the
resources necessary to provide benefits promised to
employees” and that the reasons for the change are “that the
current rules governing an employer‟s liability upon
withdrawal from a multiemployer plan fail adequately to
protect plan participants, the employers who remain in the
plan, and the PBGC premium payers”) (emphasis added).
Because 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.3

3
Marcal LLC also contends that withdrawal liability is
not based on “services rendered” to the estate.
Appellant‟s Br. at 16, 21. As explained, because
withdrawal liability is based on the proportional amount
13
 Finally, Marcal LLC contends that even if withdrawal
liability is, in part, consideration in exchange for employees‟
post-petition work on behalf of the debtor-in-possession, the
amount attributable to the post-petition work cannot be
calculated. We see no reason why the post-petition
withdrawal liability is incapable of calculation.4 To the
extent that withdrawal liability includes new vested benefits
that arose from the post-petition work of covered employees,
one can determine the extent to which those benefits have
become underfunded.

Our conclusion that post-petition withdrawal liability
should be classified as an administrative expense is consistent
with decisions of other courts that have addressed the issue.
The Second Circuit, the only other Court of Appeals to
address this issue, has suggested that post-petition withdrawal
liability can be considered an administrative expense. In re
McFarlin’s, Inc., 789 F.2d at 101-04. Although the court in
In re McFarlin’s ultimately declined to classify the
withdrawal liability as an administrative expense, it did so
because under the facts of that case the withdrawal liability
was based on “a period pre-dating the McFarlin‟s Chapter 11
proceeding and cannot therefore be treated as an
administrative expense.” Id. at 104 n.2. The court‟s analysis

of contributions the employer owed over the prior five
years, which in turn was based on the amount of work the
employees provided, withdrawal liability does bear a
casual connection to services rendered.
4
The District Court did not calculate the post-petition
portion of the withdrawal liability and left the calculation
to the Bankruptcy Court on remand. Trucking Emps. of N.
Jersey Welfare Fund, Inc., 2009 WL 3681897, at *8.
Accordingly, the actual calculation in this case is not
before us. To the extent that we discuss the possible
calculation of the post-petition withdrawal liability, it is
merely to demonstrate that it can be calculated and does
not, as Marcal LLC suggests, prevent a portion of the
withdrawal liability from being classified as an
administrative expense.
14
clearly supports a conclusion that post-petition withdrawal
liability can be considered an administrative expense.

Other courts have reached the same conclusion. See In
re Great Ne. Lumber & Millwork Corp., 64 B.R. 426, 428
(Bankr. E.D. Pa. 1986) (“the consideration supporting the
withdrawal liability is . . . the same as that supporting the
pensions themselves, the past labor of the employees . . . [t]o
the extent that the withdrawal liability is attributable to
postpetition employment, the claim would be entitled to
administrative status”); In re Cott Corp., 47 B.R. 487, 495
(Bankr. D. Conn. 1984) (holding that withdrawal liability for
the post-petition time period was an administrative claim and
that withdrawal liability is capable of being divided).5

Third Circuit cases holding that other types of benefits
can be apportioned between the pre- and post-petition period
also support our conclusion. In In re Hechinger Inv. Co. of
Del., 298 F.3d 219 (3d Cir. 2002), the employer promised
“Stay-On Benefits” to entice employees to continue working
while the employer liquidated its assets. The benefits were
based on work the employees provided both pre- and post-
petition. Id. at 225-26. The employees argued that the entire
benefit should be classified as an administrative expense

5
The case relied on most heavily by Marcal LLC is In
re HNRC Dissolution Co., 396 B.R. 461 (B.A.P. 6th Cir.
2008). We believe that this case was wrongly decided and
that the BAP‟s conclusion runs afoul of some of its own
analysis. For example, the panel recognized that the
debtor-in-possession “unquestionably” benefited from the
continued work of the covered employees, but held that
the consideration for this post-petition work was limited to
the wages paid and accrual of other benefits, such as
vacation. Id. at 476. However, as the panel recognized
elsewhere, the post-petition work also accrued the
employees‟ pension credits, entitling them to pension
benefits. Id. at 470. To the extent withdrawal liability is
an employer‟s consideration in order to ensure those
benefits can be paid, it qualifies as an administrative
expense.
15
because an employee could not receive the benefit unless he
or she worked until the end of the liquidation. Id. at 224-25.
We rejected this claim, and held that to the extent the benefit
was linked to both pre- and post-petition work, only that
portion attributable to the post-petition period was entitled to
priority. Id. at 227. There is no reason why the same should
not hold true here.

Similarly, in In re Roth Am., Inc., 975 F.2d 949, 957
(3d Cir. 1992), we held that vacation and severance benefits
that were based on the length of employment “only have
administrative priority to the extent that they are based on
services provided to the bankruptcy estate post-petition.” Put
simply, many situations can arise whereby the promised
employee benefit is in consideration for work that occurred
both pre- and post-petition and we have held that the benefit
should be and can be apportioned accordingly. Withdrawal
liability is one of those situations and we see no reason to
treat it differently.

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. See Morton v. Mancari, 417 U.S. 535, 551 (1974)
(“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.”). As discussed, the narrowly tailored
definition of administrative expense contained in the
Bankruptcy Code is designed to balance two goals: the
continued functioning of the debtor-in-possession and
preservation of the estate for downstream creditors. By
allowing only that portion of withdrawal liability attributable
to the post-petition work to be classified as an administrative
expense, we ensure that workers are provided the full benefit
of the bargain promised to them in the continued-CBA,
incentivizing their work for the DIP and ensuring its
continued functioning. At the same time, by limiting what
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constitutes an administrative expense to only that portion of
the withdrawal liability which can be fairly allocated to the
post-petition period, we help preserve the estate and prevent it
from being devoured by the entire withdrawal liability claim.

Perhaps even more importantly, by permitting the
post-petition portion of the withdrawal liability to be
classified as an administrative expense, Congress‟ objectives
in passing the MPPAA are fulfilled. If withdrawal liability in
its entirety were automatically classified as a general
unsecured claim, it would greatly undercut the purpose of the
MPPAA to secure the finances of pension funds and prevent
an employer‟s withdrawal from negatively affecting the plan
and its employee beneficiaries.

IV.

For the foregoing reasons, we will affirm the judgment
and remand to the District Court for proceedings consistent
with this opinion.

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