Restructuring

It seems like everywhere we look nowadays, there are pension disputes.  When a contributing employer for a pension fund becomes financially distressed and ceases to contribute to the fund altogether, it’s become expected that parties will fight over a host of issues, including the validity, scope and, in bankruptcy, the priority of claims for unpaid contributions and withdrawal or termination liability against the employer.  A recent decision issued by the United States District Court for the Southern District of New York in Bakery, Confectionery, Tobacco Workers and Grain Millers Int’l Union v. Hostess Brands, Inc. (In re Hostess Brands, Inc.) reminds parties that when it comes to pension disputes, sometimes you can’t have your cake and eat it too:  when a pension fund elects prepetition to terminate an employer’s participation in its fund, it cannot then later turn around and seek an administrative expense claim against the employer for postpetition contributions it failed to make to the fund because it was no longer a fund participant.
Background
The Hostess debtors were party to numerous collective bargaining agreements (CBAs) with local affiliates of the Bakery, Confectionery, Tobacco Workers and Grain Miller International Union.  Prior to their bankruptcy, they were a participating employer in the Bakery and Confectionery Union and International Health Benefits and Pension Fund, a multiemployer pension fund that covered the Union’s members, including certain of the debtors’ employees and retirees.  In August 2011, due to financial difficulties, Hostess ceased contributing to the fund.  In November 2011, the fund informed Hostess that on December 10, 2011, Hostess would become delinquent in its contributions in excess of 120 days and, as a result, the fund intended to terminate Hostess’s participation.  The fund also made clear that, upon termination, Hostess’s employees would cease accruing benefits under the fund.  On December 15, 2011, the fund confirmed that it had, in fact, terminated Hostess’s participation as of December 10, 2011 and assessed approximately $920 million of withdrawal liability against Hostess.
On January 11, 2012, Hostess filed for chapter 11 protection.  Postpetition, it continued to operate its business and employ workers represented by the Union.  The Union subsequently alleged that, from the period of January 11, 2012 to May 9, 2012, the debtors were required to continue making postpetition contributions (the pension wage deferrals) on behalf of the unionized employees in the total amount of $14 million.  The Union filed a motion for an order seeking administrative expense treatment of the pension wage deferrals and compelling immediate payment.
After a hearing, the bankruptcy court determined that, per the terms of the fund’s documents, once the fund terminated Hostess, Hostess was no longer required to contribute to the fund, except on a withdrawal basis.  Thus the Union’s claim against Hostess was more appropriately for prepetition withdrawal liability, not postpetition administrative expenses.  The bankruptcy court also found that (1) even if certain CBAs required Hostess to continue to make contributions, the decision of the fund’s trustees to terminate Hostess’s participation in this particular instance made it impossible for Hostess to perform and (2) the relief sought might not be feasible because the fund’s prepetition actions precluded automatic reinstatement of Hostess in the fund, and it was unclear whether reinstating Hostess would run afoul of the automatic stay by elevating the priority of the general unsecured withdrawal claim to a “100-cent” claim.  The bankruptcy court denied the Union’s motion, and the Union appealed.  The sole issue raised on appeal was whether the debtors remained contractually obligated to make postpetition pension contributions to a multi-employer pension fund on behalf of the unionized employees.
District Court’s Opinion
The district court affirmed the bankruptcy court’s order and agreed that the debtors did not remain contractually obligated to contribute the pension wage deferrals once the Union had terminated Hostess from the fund.
The district court rejected the Union’s argument that the fund’s decision to expel Hostess was “wholly unrelated” to Hostess’s continuing obligation to contribute under the CBAs.  The district court looked to the plain meaning of the language in the CBAs that governed the debtors’ obligations to the fund.  The CBAs required the debtors to make contributions specifically to the fund.  No other avenues for making contributions were mentioned.  In addition, the vast majority of the CBAs included language that the pension clauses in the CBAs (requiring payment specifically to the fund) “encompasse[d] the sole and total agreement between the Employer and the Union with respect to pensions or retirement.”  The CBAs also expressly incorporated the fund’s trust agreement, which granted the trustees discretion to terminate an employer when the employer was delinquent in contributions.  Read together, the district court thought the CBAs and trust agreements made clear that the obligation to make payments specifically to the fund (as opposed to make payments generally) could not survive the fund’s decision to expel Hostess as a contributing employer from the fund.
The district court also did not buy the Union’s arguments that neither the fund, as a “mere third party beneficiary,” nor its trustees had the authority to extinguish Hostess’s contribution obligations under the CBAs.  The district court distinguished this case from one where a pension fund trustee is trying to intervene in the collective bargaining process itself or improperly modify contribution payment rates.  Here, the very outcome of the collective bargaining process between Hostess and the Union was that the parties chose to adopt CBAs with express language that provided only one avenue for Hostess to make contributions (through the fund) and that incorporated a trust agreement that explicitly gave the fund’s trustees the contractual authority to expel Hostess from the fund.
As further support for its conclusion, the district court noted that, after Hostess’s termination, the fund stopped crediting covered employees for the pension credits they earned and, upon termination, the fund assessed withdrawal liability against Hostess.  Because the consideration supporting the withdrawal liability was based upon prepetition labor, the Union’s proper claim was not for a postpetition administrative expense claim for pension wage deferrals but a prepetition general unsecured claim for withdrawal liability.
For a small subset of the CBAs that did not include language that the pension clauses in the CBAs “encompasse[d] the sole and total agreement between the Employer and the Union with respect to pensions or retirement,” the district court agreed with the bankruptcy court that the doctrine of impossibility excused Hostess’s obligation to continue contributing to the fund.  The doctrine of impossibility excuses a party’s contractual duty to perform when unforeseeable, supervening circumstances render performance impossible.  The district court determined that once the fund decided to expel Hostess, it “eliminated the only avenue through which Hostess might make [the required payments].”  The district court rejected the Union’s assertions that Hostess created the impossibility of performance by its delinquency and therefore should not benefit from asserting the doctrine as a defense.  The court noted that the intervening cause of termination was not Hostess’s delinquency, but the fund’s trustees exercising their discretion to terminate Hostess from the fund.
Notably, several other pension funds in which Hostess had been participating elected not to expel Hostess as a participant in their respective funds, despite its continuing failure to make ongoing contributions.  Those pension funds successfully sought administrative expense priority for the postpetition contributions owed to their respective funds.  Unfortunately, because the fund had elected to terminate Hostess prepetition, the Union could not subsequently claim it was owed postpetition contributions subject to administrative expense priority.  Thus, perhaps among the “host” of lessons learned by the Union, was that it could not have its cake and eat it too.