Bakery, Confectionery, Tobacco Workers & Grain Millers International Union v. Hostess Brands, Inc.
Docket: No. 12 Civ. 5708(ER)
Court: District Court, S.D. New York; September 27, 2013; Federal District Court
The Bakery, Confectionery, Tobacco Workers and Grain Millers International Union (BCT) appeals a Bankruptcy Court order denying its request for administrative expense treatment for post-petition pension contributions owed by Hostess to a multiemployer pension fund (the B.C. Fund). The appeal centers on whether Hostess is still contractually required to make these pension contributions under existing collective bargaining agreements (CBAs). Hostess has 117 CBAs with BCT local unions, which govern employee compensation and benefits, including a mandate to contribute to the B.C. Fund for employees represented by BCT. Most CBAs (111 out of 117) specifically require these payments, and the B.C. Fund is the exclusive mechanism for pension contributions as outlined in the Trust Agreement incorporated into the CBAs. The Trust Agreement stipulates that Hostess is obligated to continue contributions as long as it remains an employer under the CBAs. It defines an employer's status in relation to contribution obligations and allows trustees to terminate participation in the fund if the employer fails to comply. The Bankruptcy Court's order has been affirmed, upholding the denial of BCT's motion.
In August 2011, Hostess faced financial difficulties and could not make required contributions to the B.C. Fund and thirty-nine other multiemployer pension funds. On November 10, 2011, the B.C. Fund notified Hostess that it would be considered delinquent for contributions exceeding 120 days on December 10, 2011, and that termination of participation would occur thereafter. Following this policy, the B.C. Fund confirmed Hostess's termination on December 15, 2011, due to the delinquency, which resulted in the cessation of benefits accrual for Hostess employees under the fund. Additionally, Hostess was assessed $919,806,165 in withdrawal liability for its total withdrawal from the B.C. Fund.
Hostess filed for Chapter 11 bankruptcy protection on January 11, 2012, with approximately 7,000 out of 19,000 employees represented by the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union (BCT). Despite the bankruptcy, Hostess was authorized to continue operations, and employees continued to work. On May 9, 2012, the Appellant claimed Hostess owed $14,000,000 in Pension Wage Deferrals for unionized employees accrued after the bankruptcy filing, based on collective bargaining agreements (CBAs). The Appellant filed a motion for administrative expense treatment for these deferrals.
Between April 2 and May 11, 2012, nine other pension funds filed similar motions for unpaid post-petition contributions. Unlike the B.C. Fund, these other funds did not terminate Hostess’s participation, despite its contribution failures since August 2011. After hearings on May 30 and June 19, 2012, Judge Drain granted administrative expense priority to the Pension Wage Deferrals owed to the other funds but denied the Appellant’s motion, determining that Hostess was no longer an “employer” under the Trust Agreement of the B.C. Fund following its December 2011 termination and thus was not obligated to contribute except on a withdrawal basis.
Claims related to Hostess's withdrawal liability pertain to pre-petition obligations, not post-petition administrative expenses. The Bankruptcy Court determined that, despite certain CBAs potentially requiring Hostess to continue contributions after December 2011, the trustees' termination of Hostess’s participation in the B.C. Fund made it impossible for Hostess to comply. Furthermore, reinstating Hostess in the B.C. Fund was deemed infeasible due to pre-petition actions that prevented automatic reinstatement, and any unilateral attempts to reinstate could violate the automatic stay under Section 362 of the Bankruptcy Code, thereby converting a withdrawal claim into a fully post-petition claim. The Bankruptcy Court denied the Appellant's motion on June 27, 2012, with a notice of appeal filed the following day.
The court's jurisdiction to hear bankruptcy appeals is established under 28 U.S.C. § 158(a), where findings of fact are reviewed for clear error and legal conclusions are reviewed de novo. The sole issue on appeal is whether Hostess holds a contractual obligation to make post-petition Pension Wage Deferral Payments to the B.C. Fund for BCT-represented employees. Although contract interpretation is typically a legal question, it becomes a factual issue when the language allows for multiple reasonable interpretations.
The Bankruptcy Court appropriately denied the motion for administrative expenses, following established case law in the Second Circuit. Administrative expenses are prioritized under Section 507 of the Bankruptcy Code, including necessary costs incurred post-bankruptcy, but must stem from transactions benefiting the debtor-in-possession.
A debt does not gain priority merely due to the timing of its emergence; it must arise from a post-petition transaction where the consideration benefits the debtor-in-possession's business operations. Bankruptcy law typically presumes equal distribution of a debtor's limited resources among creditors, leading to narrow constructions of statutory priorities. The burden of proving entitlement to priority payment as an administrative expense lies with the claimant. Under the Multiemployer Pension Plan Amendments Act (MPPAA), an employer withdrawing from a multiemployer plan incurs "withdrawal liability," which can be classified as an administrative expense if it results from a transaction with the debtor-in-possession that benefits them. Claims for pension contributions post-petition were denied for Hostess, as its obligation to contribute to the B.C. Fund ended pre-petition when Hostess was terminated as an "employer" by the fund trustees. The Appellant's arguments regarding third-party beneficiary rights and the role of the fund trustees did not alter the Bankruptcy Court's conclusion, which found that Hostess's obligations to the fund were clearly defined in the collective bargaining agreements (CBAs) and were unaffected by the trustees' actions. The CBAs specify Hostess's contribution requirements, with the B.C. Fund serving as the sole channel for these payments.
The collective bargaining agreements (CBAs) predominantly contain provisions that the pension benefits clause, which entails contributions to the B.C. Fund, constitutes the complete agreement between the Employer and the Union regarding pensions or retirement. The CBAs also incorporate the Trust Agreement, allowing trustees to terminate an employer’s status if they are delinquent in contributions. The language within the CBAs defines the employer's obligations to a multiemployer fund, with New York law emphasizing that the intent expressed in written contracts is paramount. The Bankruptcy Court affirmed that the employer's commitment to make pension fund payments is the totality of the agreement, with the Trust Agreement's terms governing Hostess's pension obligations.
The context is not about a trustee intervening in collective bargaining but rather the outcome of negotiations leading to CBAs that limited Hostess's contribution options to the B.C. Fund and allowed trustee authority to expel Hostess from the Fund. Hostess's failure to contribute for over 120 days resulted in its termination from the B.C. Fund effective December 10, 2011, after which it ceased to be classified as an "employer" under the Trust Agreement. Consequently, the B.C. Fund stopped crediting employees for pension benefits and Hostess's obligation to make contributions ended. Appellant's argument that Hostess should still pay pension wage deferrals under the CBAs fails, as the plain language of the agreements indicates that the obligation to contribute to the B.C. Fund is void following the Fund's decision to terminate Hostess. After the termination, Hostess only faced withdrawal liability and was not required to make further contributions except on a withdrawal basis.
Consideration for withdrawal liability in this case stems from pre-petition labor, consistent with McFarlin's precedent, establishing that the claim should be classified as withdrawal liability rather than administrative expenses, which do not have administrative expense priority. The Bankruptcy Court correctly determined that Hostess's withdrawal liability is a general, unsecured claim, following the ruling in Matter of Cott Corp.
Regarding the doctrine of impossibility, three of the Collective Bargaining Agreements (CBAs) lack a specific provision found in over 100 other CBAs that designates pension benefit clauses as the sole agreement between the parties. Despite this, Judge Drain concluded that these CBAs imposed an obligation on Hostess to contribute to the pension fund, although Hostess was unable to fulfill this due to the pension fund’s actions. The court held that the doctrine of impossibility applies because the B.C. Fund's decision to terminate Hostess eliminated its ability to make the required payments.
Impossibility, as defined, excuses performance under unforeseeable circumstances that render it impossible, such as governmental actions or destruction of the contract's subject matter. The Bankruptcy Court's determination that Hostess's expulsion was caused by the B.C. Fund's actions is a factual finding, subject to review only for clear error. The appellant's argument that Hostess created its own impossibility by failing to make payments overlooks the B.C. Fund's role as the intervening cause of the expulsion. The Trust Agreement grants trustees the discretion to terminate participation for delinquency, which they exercised. Thus, the Bankruptcy Court's finding that Hostess's inability to perform was caused by the B.C. Fund’s actions was not clearly erroneous.
The Bankruptcy Court questioned the feasibility of the Appellant's remedy regarding reinstatement and direct payment to employees, indicating that such a unilateral action could improperly elevate a withdrawal claim under Section 362 of the bankruptcy code. The Court affirmed that Hostess was not obligated to perform under the collective bargaining agreements (CBAs) and found its previous rulings on the Appellant's requested remedies to be valid. Consequently, the June 27, 2012 order and judgment by the Bankruptcy Court were upheld.
The CBAs in question generally included "sole and total agreement" clauses, with exceptions noted for three specific agreements. The Appellant contended that Hostess owed additional contributions accrued since May 2012 but failed to specify an exact amount. Following the Bankruptcy Court's May 4, 2012 order, Hostess rejected certain CBAs and modified retiree benefits under Sections 1113(c) and 1114(g). The Appellant argued that Hostess retained obligations for post-petition wages and benefits to covered employees under the CBAs, claiming entitlement to administrative expense priority under Section 503(b) of the Bankruptcy Code and current payment under Section 1113(f), which forbids unilateral CBA termination.
The Bankruptcy Court determined that it would only consider the administrative expense priority under Section 503(b) since Section 1113(f) did not address claim priority. A separate fund, Local 550, sought administrative expenses for contributions due post-petition. The Bankruptcy Court's findings do not prevent Hostess from negotiating terms that could address the financial claims of the fund or union in future agreements. Despite the Appellant's inability to secure administrative expense priority for Pension Wage Deferrals, alternative remedies may still be available.
