An employer who withdraws their participation in a multi-employer defined benefits plan is statutorily required to pay the plan a withdrawal liability. Employee Retirement Income Security Act of 1974 ("ERISA"), as amended by the Multiemployer Pension Plan Amendments Act of 1980 ("MPPAA"), provides a number of formulas to assist a multi-employer defined benefits plan's actuary with calculating the withdrawal liability amount. Congress imposed withdrawal liability on withdrawing employers "(1) to protect the interests of participants and beneficiaries in financially distressed multiemployer plans, and (2) ... to ensure benefit security to plan participants." An employer's ability-and willingness-to pay withdrawal liability is compromised when the employer files a Chapter 11 petition. Typically, unsecured, pre-petition debts in a Chapter 11 reorganization are discharged unless the United States Bankruptcy Code grants the debt priority status in repayment. The Bankruptcy Code does not expressly designate withdrawal liability as a non-dischargeable debt, but discharging withdrawal liability would cost the defined benefits plan’s beneficiaries their promised benefits.
To challenge the dischargeability of withdrawal liability claims, defined benefits plans have argued that withdrawal liability claims deserve administrative expense priority status, as defined in Chapter 5 of the Bankruptcy Code. Employers rebut that proposition, arguing that withdrawal liability claims are not entitled to administrative expense priority status because the claim amount is calculated using factors that arose in the pre-Chapter 11 filing period. This memorandum addresses whether withdrawal liability claims are entitled to priority status as administrative expenses. Part I explains the legal standard for classifying a withdrawal liability claim as an administrative expense. Part II examines the specific factors of the legal standard, and how courts apply them differently.