Introduction
It is not surprising that bankruptcy courts are often tasked with navigating conflicts between the Employee Retirement Income Security Act of 1974 (“ERISA”)[i] and the Bankruptcy Code.[ii] Indeed, these federal laws often embody divergent goals. Federal bankruptcy laws are designed to provide companies with a fresh start through reorganization or restructuring financial obligations. ERISA was enacted to ensure that pension plans are fully funded. Toward that end, ERISA imposes financial penalties, or “withdrawal liability,” on those contributing employers who withdraw from multiemployer pension funds.
This inherent tension was highlighted in an interesting decision issued in the Caesars[iii] bankruptcy case. In Caesars,[iv] the United States Bankruptcy Court for the Northern District of Illinois was asked to reconcile a conflict between the automatic stay provisions of the Bankruptcy Code and the controlled group provisions of ERISA. To comprehend the Court’s rulings, a brief overview of the relevant statutory provisions is warranted. Under the automatic stay provision, codified at section 362 of the Bankruptcy Code,[v] creditors are prohibited from asserting claims or enforcing debts against a bankrupt company or “debtor.” The controlled group provisions of ERISA, 29 U.S.C. §1301(b)(1), enable a pension fund to collect unpaid pension obligations from companies that share common ownership with the contributing employer. Specifically, ERISA provides that all trades or businesses under “common control” constitute a “single employer” that is subject to withdrawal liability. Notably, the liability of controlled group members is joint and several. Thus, a pension fund may choose to collect the indebtedness from one member of the controlled group for all or part of the amount due.[vi]
At issue in Caesars was whether the bankruptcy filing of a contributing employer barred the fund from collecting the unsatisfied obligations from the employer’s non-bankrupt affiliates as a member of the employer’s controlled group. Notably, the Bankruptcy Court held that the automatic stay triggered by the contributing employer’s bankruptcy filing did not preclude the pension fund from pursuing withdrawal liability claims from the non-bankrupt affiliates of the employer.
Factual Background
Before their financial demise, a number of companies that operated the Caesars casino were contributing employers (the “Caesars Contributing Employers”) to a multiemployer pension fund operated by the National Retirement Fund (“NRF”). NRF was a multiemployer pension plan established under, and governed by, ERISA. On January 12, 2015, three creditors filed an involuntary bankruptcy petition against Caesars Entertainment Operating Co., Inc. (“CEOC”). On January 15, 2015 (the “Petition Date”), CEOC, and more than 170 of its subsidiaries, including some of the Caesars Contributing Employers (collectively, the “Debtors”), filed voluntary bankruptcy petitions thereby triggering the automatic stay. Notably, two of the Caesars Contributing Employers (the “Non-Debtor Contributing Employers”) did not file for bankruptcy protection.
Approximately one month after the Petition Date, NRF served the Non-Debtor Contributing Employers with a notice assessing withdrawal liability under ERISA and demanding payment. The notice was directed to the Non-Debtor Contributing Employers and “all members of the controlled group that have not filed for bankruptcy.” The notice did not demand payment from any of the Debtors. Thereafter, NRF filed an action against the Non-Debtor Contributing Employers seeking to collect the withdrawal liability.
The Debtors filed a motion in the Bankruptcy Court seeking to enforce the automatic stay against NRF.[vii] The chief argument advanced in connection with the motion was premised on the controlled group provisions of ERISA. In support of their argument, the Debtors attempted to conflate the provisions of ERISA and the Bankruptcy Code to their advantage. As stated above, entities that are affiliated with a contributing employer through common ownership may be held liable as members of a controlled group for a contributing employer’s withdrawal liability. The Debtors asserted that by demanding payment from the Non-Debtor Contributing Employers, it necessarily followed that NRF was likewise demanding payment from all members of the controlled group, including some of the Debtors. In effect, the Debtors argued that: (i) all of the members of a controlled group were a “single employer” within the meaning of ERISA; (ii) the single employer – both bankrupt and non-bankrupt companies alike – formed a “debtor” within the meaning of section 362 of the Bankruptcy Code; and (iii) the single employer/debtor was entitled to the protections of the automatic stay.
Caesars’ Holding
The Bankruptcy Court flatly rejected these arguments. In doing so, the Court adopted a strict construction of the automatic stay provisions of the Bankruptcy Code and noted that it only protects “debtors” or those entities that seek bankruptcy protection.[viii] In reaching this holding, the Court denied the Debtors’ attempts to conflate the Caesars’ entities into one single employer/debtor for purposes of the automatic stay. The Court noted that because controlled group liability is joint and several, the bankruptcy of one member of a controlled group has no bearing on the liability of other members.[ix] The Caesars Court also highlighted that in other sections of the Bankruptcy Code, Congress explicitly stayed acts against non-debtors who were liable on debts with the debtor. By failing to include similar language in section 362, the Court concluded that Congress did not intend to protect non-debtors.[x]
Second, the Court observed that the position advanced by the Debtors was at odds with the underlying purpose of ERISA. The purpose of the controlled group provisions under ERISA was to prevent employers from shirking their pension obligations by “fractionalizing operations into many separate entities” or “shifting its assets into its back pockets.”[xi] Controlled group principles were intended to expand withdrawal liability beyond the contributing employer. The Caesar’s Court explained that under the Debtors’ theory, recovering withdrawal liability would be impossible whenever any controlled group member filed for bankruptcy protection because the automatic stay would protect the entire controlled group, including non‑debtors. Application of automatic stay in this fashion, the Court reasoned, would contravene the principles of ERISA.[xii] The Court concluded that such a result was not what Congress envisioned when it enacted ERISA.[xiii]
Conclusion
When a contributing employer is insolvent, multi-employer pension funds will often look to alternative sources to recover unfunded obligations. Trades or businesses within the contributing employer’s controlled group are frequent targets. While a contributing employer’s bankruptcy filing will shield that company from withdrawal liability litigation, under Caesars’ rationale, the automatic stay triggered by that bankruptcy will not protect non-bankrupt members of the controlled group. Those controlled group members may comprise a “single employer” within the meaning of ERISA; however, that single employer does not constitute a “debtor” that is entitled to the protections of the automatic stay. Only those entities that are in bankruptcy are entitled to such protection. If this rationale is adopted by other courts, contributing employers will not be able to rely on their bankruptcy filing to protect all controlled group members.
This publication is intended as a general guide only. It does not constitute legal advice of Stevens & Lee, P.C. or any member of the firm with respect to the legal issues described. The opinions expressed herein are those of the authors, and not necessarily those of their respective firms. It is recommended that readers not rely on this general guide in structuring transactions in which they are involved, but that professional advice be sought.
Related Attorney:
John C. Kilgannon
[i] 29 U.S.C. §1001, et seq.
[ii] 11 U.S.C. §101, et seq.
[iii] In re Caesars Entertainment Operating Co., Inc., et al., United States Bankruptcy Court Northern District of Illinois, Case No. 15 B 1145 (Jointly Administered)
[iv] In re Caesars Entertainment Operating Co., Inc., 540 B.R. 637 (Bankr. N.D. Ill. 2015).
[v] 11 U.S.C. §362(a)
[vi] Central States, Se. & Sw. States Pension Fund v. Hayes, 789 F. Supp. 1430, 1434 (N.D. Ill. 1992).
[vii] The Debtors filed a second motion asserting that NRF violated the automatic stay when it expelled the Caesars Contributing Employers from the pension fund.
[viii] Id. at 642.
[ix] Id. at 644.
[x] Id. at 643.
[xi] Id. at 646.
[xii] Id.
[xiii] Id.