Pension Fund Withdrawal Liability: No Problem for § 363 Sale

Section 363 allows a debtor to sell its assets free and clear of interests in such property. If a creditor has a significant claim on a debtor’s assets, a § 363 sale may allow a debtor to sell its assets at a higher price than it could outside of bankruptcy. When debtors attempted a § 363 sale of their assets in In re K & D Industrial Services, the U.S. Bankruptcy Court for the Eastern District of Michigan addressed whether they could make the sale free and clear of a pension fund’s claim.

Attempted Bankruptcy Sale Free and Clear of Withdrawal Liability to Pension Fund

The debtor holding company owned several companies (K & D Companies) that provided environmental and industrial services.[1] Two of its companies entered into collective bargaining agreements (CBAs) with a union.[2] These CBAs required the two companies to contribute to a multi-employer pension fund.[3] In 2018, the K & D Companies sought either refinancing or an infusion of capital to continue operating.[4] Because of the potential of withdrawal liability to the pension fund, however, the K & D Companies failed to obtain the needed refinancing or infusion of capital.[5] They also realized that they could not sell their assets and cease business operations without triggering withdrawal liability to the Pension Fund.[6]

To wind down their affairs without triggering withdrawal liability, the K & D Companies filed for bankruptcy under chapter 11.[7] In the jointly administered bankruptcy cases, each of the debtors listed the pension fund as the holder of a contingent claim for withdrawal liability in the amount of about $3.4 million.[8] In their first sale motion, the debtors sought to sell $500,000 worth of assets by entering into an asset-purchase agreement with Cleaning Contractors Inc. (CCI).[9] Because CCI would only purchase the assets if it would have no obligation to pay the withdrawal liability, the sale motion requested that the sale be made free and clear of the pension fund’s possible employer withdrawal-liability claim.[10] Two weeks after the filing of the sale motion, the pension fund objected to its free-and-clear language.[11] The pension fund did not object to the sale itself, but the pension fund did not want CCI to buy the debtors’ assets without also taking the possible employer withdrawal liability.[12]

Court Approves Sale to Stalking-Horse Bidder

The main issue in the case was whether the debtors could make the sale of the assets to CCI free and clear of the pension fund’s interest in the assets under § 363.[13] Because its claim was not an in rem interest in those assets, the pension fund contended that its claim did not fit within the “interest in such property” language from § 363.[14] However, the court relied on Sixth Circuit precedent to find that § 363 permits a sale free and clear of any claim and an in rem interest in property.[15]

To find for the debtors, the court also relied on persuasive authority from the Second Circuit about an approved sale from the bankruptcy of General Motors.[16] After the sale of General Motors, several creditors of the old company sought to collect debts from the new company that purchased the assets.[17] To resolve issues with claimants who held successor-liability claims, the Second Circuit adopted the following standard:

To summarize, a bankruptcy court may approve a § 363 sale “free and clear” of successor liability claims if those claims flow from the debtor's ownership of the sold assets. Such a claim must arise from a (1) right to payment (2) that arose before the filing of the petition or resulted from pre-petition conduct fairly giving rise to the claim. Further, there must be some contact or relationship between the debtor and the claimant such that the claimant is identifiable.[18]

Because the pension fund’s claim for withdrawal liability was directly related to the ownership and use of the assets by the K & D Companies, the court concluded that the pension fund’s claim was an interest in such assets under § 363.[19] Thus, because the debtors followed the conditions set forth in § 363(b) and § 363(f)(1)–(5), the court approved the sale of the assets to CCI free and clear of the pension fund’s interest in the assets.[20]

Other Issues Resolved in Favor of Sale Motion

The pension fund raised three additional arguments in opposition to the sale motion. First, it asserted that the sale could not be made free and clear of its claim because it did not hold a claim for withdrawal liability at the time of the sale.[21] The pension fund claimed that the debtors would first need to withdraw from the pension fund before such a claim would arise.[22] Even though § 105(5)(A) defines a claim as any right to payment — whether fixed or contingent — the pension fund found support for its conflicting position from a Sixth Circuit case.[23] The court, however, distinguished the case on the facts and held that the pension fund’s untriggered withdrawal liability was a claim under § 101(5)(A).[24]

Second, the pension fund argued that the public policy of ERISA prohibited the court from following the Bankruptcy Code and allowing the sale free and clear of the withdrawal liability.[25] Despite the strong policy in favor of protecting multi-employer pension plans such as the one in this case, the court found that § 363 expressly authorized the sale.[26] Finally, the pension fund contended that the sale motion was invalid under ERISA because its principal purpose was to evade or avoid withdrawal liability.[27] Because nothing in the record supported that conclusion, the court found this argument unpersuasive as well.[28]

Conclusion

[29] With the court’s approval, the debtors were allowed to sell their assets at a higher price than they could have outside of bankruptcy.[30] This bankruptcy sale may have hurt the pension fund, but it helped preserve value in the assets.[31]