Appendix — Pension Benefit Guaranty Corp. v. CF&I Fabricators of Utah, Inc., 119 S. Ct. 2020 (1999) (No. 98-1440)

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In THE

Supreme Court of the United States

OCTOBER TERM, 1998

PENSION BENEFIT GUARANTY CORPORATION,

Petitioner,

REORGANIZED CF&I FABRICATORS OF UTAH, INC., ef al.,

Respondents.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Tenth Circuit

APPENDIX TO

PETITION FOR A WRIT OF CERTIORARI

JAMES J. KEIGHTLEY *

General Counsel

WILLIAM G. BEYER

Deputy General Counsel

ISRAEL GOLDOWITZ

SUSAN E. BIRENBAUM

Assistant General Counsels

GARTH D. WILSON

NATHANIEL RAYLE

Of Counsel: KENNETH J. COOPER

RICHARD K. WILLARD JAMES C. MCCARROLL

CHARLES G. COLE Attorneys

STEPTOE & JOHNSON, L.L.P.

1330 Connecticut Ave., N.W.

Washington, D.C, 20036-1795 1200 K Street, N.W.

(202) 429-8000 Washington, D.C. 20005

* Counsel of Record (202) 326-4020

PENSION BENEFIT GUARANTY

CORPORATION

WILSON - Epes PRINTING Co., INC. - 789-0096 - WASHINGTON, D.C. 20001

@ ee.

TABLE OF CONTENTS

Opinions Page

Opinion of the United States Court of Appeals for

the Tenth Circuit, Filed August 38,1998... la

Final Judgment of the United States District Court

for the District of Utah, Central Division, Filed

PEO Wi TT woe ceed ee ee 16a

Decision of the United States District Court for

the District of Utah, Central Division, Filed

BON hs SORT ihe Se oy 18a

Order of the United States Bankruptcy Court for

the District of Utah, Central Division, Filed

January 26,1996... si ilabilahiblintiadiaca eae ia tao Bod 25a

Decision of the United States Bankruptcy Court

for the District of Utah, Central Division, Filed

SVOWUNIONS i. RO eg A 27a

Opinion of the United States District Court for the

District of Utah, Central Division, Filed Novem-

We CU SO a gk a Foal ie oe 3 4la

Order of the United States Bankruptcy Court for

the District of Utah, Central Division, Filed

PORE We RO a AS a a 56a

Decision and Order of the United States Bank-

ruptcy Court for the District of Utah, Central

Division, Filed November Sy, SE ae 79a

Order of the United States Court of Appeals for

the Tenth Circuit, Filed October i ee 98a

Statutes

29 U.S.C. (1988)

ecepnpcintaes dhe page ht SA EN ME Ee 100a

FREI BRN aio eh et ad a a 126a

POO i cs ha ct 130a

TABLE OF CONTENTS—Continued

Page

11 U.S.C. (1988)

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[Filed Aug. 3, 1998]

UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

No. 97-4121

IN RE: CF&I FABRICATORS OF UTAH, INC., ef al.,

Reorganized Debtors.

PENSION BENEFIT GUARANTY CORPORATION,

Appellant,

CF&I FABRICATORS OF UTAH, INC.; CoLorRADO & UTAH

LAND COMPANY; KANSAS METALS COMPANY; ALBU-

QUERQUE METALS COMPANY; PUEBLO METALS CoM-

PANY; DENVER METALS COMPANY; PUEBLO RAILROAD

SERVICE COMPANY; CF&I FABRICATORS OF COLORADO,

Inc.; CF&l STEEL CORPORATION;-COLORADO & Wyo-

MING RAILWAY COMPANY; UNSECURED CREDITORS

COMMITTEE; UNITED STEELWORKERS OF AMERICA

AFL-CIO-CLC; WILLIAM J. WESTMARK, Trustee of the

Colorado & Wyoming Railway Company,

Appellees.

No. 97-4122

Lv RE: CF&I FABRICATORS OF UTAH, INC., et al.,

Reorganized Debtors.

PENSION BENEFIT GUARANTY CORPORATION,

Appellant,

CF&I FABRICATORS OF UTAH, INC.; COLORADO & UTAH

LAND COMPANY; KANSAS METALS COMPANY; ALBU-

QUERQUE METALS COMPANY; PUEBLO METALS COM-

PANY; DENVER METALS COMPANY; PUEBLO RAILROAD

SERVICE COMPANY; CF&I FABRICATORS OF COLORADO,

Inc.; COLORADO & WYOMING RAILWAY COMPANY,

Appellees.

Appeal From the United States District Court

for the District of Utah

(D.C. Nos. 93-CV-744-B and 96-CV-202-B)

Before PORFILIO, McKAY, and TACHA, Circuit Judges.

PORFILIO, Circuit Judge.

In this appeal we are asked to determine whether

claims for a Chapter 11 debtor’s minimum contributions

to an employee pension plan are entitled to tax or ad-

ministrative priority in bankruptcy. In addition, we must

determine which valuation method should be used to

calculate the present value of unfunded benefit liabilities

owed by CF&I Steel Corporation and its subsidiaries

(CF&I), Appellees-Debtors in this case.

This inquiry comes to us because of a conflict between

provisions of the Employee Retirement Income Security

Act (ERISA) and the Bankruptcy Code. Appellant Pen-

sion Benefit Guaranty Corporation (PBGC), a private

governmental corporation modeled after the Federal De-

posit Insurance Corporation and charged statutorily with

protecting and preserving private pension plans, seeks to

recover sums by way of priority claims from CF&I’s Chap-

ter 11 bankruptcy estate. PBGC bases its rights to bank-

ruptcy priority chiefly upon powers and rights vested in

it by ERISA, but not the Bankruptcy Code. The major

controversy between the parties is whether the ERISA

provisions carry over into bankruptcy or whether PBGC

comes to Chapter 11 like any other unsecured creditor.

After consideration of all the arguments, we conclude

PBGC is not entitled to special rights in bankruptcy and

its ERISA powers and rights do not give it priority over

the other unsecured creditors of CF&I’s estate.

A. Background

Prior to the economic events which eventually led CF&I

into Chapter 11, it sponsored a defined benefit pension

plan subject to the termination provisions of Title IV of

ERISA. An employer’s choice to initiate such a pension

plan is totally voluntary; however, once that plan is estab-

lished, the employer must meet the minimum funding

standards prescribed in the Internal Revenue Code (IRC)

and ERISA. Moreover, the employer must meet these

standards until its plan is terminated either voluntarily by

the employer or involuntarily by PBGC.

CF&I met its funding obligations until a decline in eco-

nomic conditions of the American steel industry left it

unable to make minimum funding contributions of ap-

proximately $14 million. This state of affairs led CF&I

into filing a Petition for Relief under Chapter 11 of the

Bankruptcy Code.

CF&I continued to operate its business as debtor-in-

possession and made substantial contributions to non-

PBGC insured employee benefit plans providing health

and life insurance. Although CF&I made no contributions

to its pension plan, it did not seek voluntary termination.

Finally, when the assets of the estate dwindled, PBGC

terminated the plan and became its statutory trustee. See

29 U.S.C. § 1342 (“The [PBGC] may institute proceed-

ings under this section to terminate a plan whenever it

determines that . . . the plan has not met the minimum

funding standard required under section 412 of Title 26.

corn

Subsequently, CF&I achieved confirmation of a nego-

tiated plan of reorganization which, among other provi-

sions, set aside a sum of money as an “Appeal Fund”

preserving PBGC’s right to pursue its claims against that

fund. PBGC has agreed to limit its recovery, if any, to

the amount set aside.

PBGC filed two claims against the estate. The first

was in the amount of $64,874,511 for CF&lI’s unpaid

contributions to the benefit plan. The second was in the

amount of $263,200,000 for unfunded benefit liabilities

accruing because of the lack of assets in the benefit plan.

For reasons we shall discuss later, PBGC asserted its

claims were entitled to priority payment as a tax claim

and were a cost of the estate entitled to priority as an

administrative claim.

The bankruptcy court held PBGC was entitled to an

administrative priority claim for the post-petition com-

ponent of its unpaid contributions claim attributable to

post-petition services of employees. However, the court

denied tax priority or administrative priority for amounts

other than these post-petition costs. The district court

affirmed these decisions.

However, the district court reversed the bankruptcy

court’s holding that PBGC’s unfunded benefits claim,

which must be reduced to present value to be allowed,

should be valued in accordance with PBGC’s regulatory

system and not by Bankruptcy Code standards. Finding

an inexorable conflict between ERISA and the Bank-

ruptcy Code, the court held the Bankruptcy Code must

dominate. Hence, it concluded, “the actuarial present

value of guaranteed benefits in a reorganization context

[must be] determined according to bankruptcy law.” On

remand, the bankruptcy court applied the “prudent-

investor” valuation method and allowed PBGC a general

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unsecured claim in the amount of $124,441,000 as the

present value of CF&I’s unfunded benefit plan future lia-

bilities.

On appeal to this court, PBGC contends the district

court erred by denying tax priority to its first claim based

on unpaid past plan contributions in excess of $1 million

and administrative priority to its entire claim for unpaid

plan contributions. It also contends the court erred by

refusing to use PBGC’s regulatory methodology to deter-

mine the present value of the unfunded benefits claim.

B. Tax Priority

PBGC argues because of specific provisions in ERISA,

we should conclude Congress expressly directed that

CF&l’s unpaid minimum funding contributions in excess

of $1 million must be treated as taxes and accorded tax

priority under the Bankruptcy Code. The district court’s

denial of tax priority is a conclusion of law which we

review de novo. Broitman vy. Kirkland (In re Kirkland),

86 F.3d 172, 174 (10th Cir. 1996).

PBGC’s argument is grounded upon 26 U.S.C. § 412

(n)(1)(B) which provides, when unpaid minimum fund-

ing contributions exceed $1 million, “then there shall be a

lien, in favor of the plan . . . upon all property, whether

real or personal, belonging to such person... .” More-

over, 26 U.S.C. § 412(n)(4) (1990) adds:

(B) Period of lien.—The lien imposed by paragraph

(1) shall arise on the 60th day following the due

date for the required installment... .

spect to which a lien is imposed under paragraph (1)

shall be treated as taxes due and owing the United

States and rules similar to the rules of subsections

(c), (d), and (e) of section 4068 of the Employee

Retirement Income Security Act of 1974 shall apply

giclee tiie ia usa i a ee ea

with respect to a lien imposed by subsection (a) and

the amount with respect to such lien.

The first question we must resolve, however, is to what

extent these ERISA provisions are applicable in bank-

ruptcy. To resolve the question, both parties point to

United States v. Reorganized CF&l Fabricators, Inc. (In

re CF&lI Fabricators (1)), 518 U.S. 213 (1996), where

the Court examined whether an “exaction ought to be

treated as a tax [in bankruptcy] . . . without some...

dispositive direction [from Congress].” Jd. at 219. At

issue was an exaction under the IRC of 10% on the

amount of the accumulated funding deficiency of CF&I’s

Plan for which the IRS asserted a tax priority claim.

Although the IRC defines the exaction as a “tax,” the

Court stated, “characterizations in the Internal Revenue

Code are not dispositive in the bankruptcy context... .”

Id. at 224.

To determine whether Congress intended the exactions

be given tax treatment in the bankruptcy context, the

Court first looked for some “explicit connector between”

the IRC provision and the Bankruptcy Code. Finding no

link, the Court “looked behind the label placed on the

exaction” and conducted a “functional examination” of

the provision in question to determine whether it was “ ‘a

pecuniary burden laid upon individuals or property for

the purpose of supporting the Government.’” Jd. (quoting

New Jersey v. Anderson, 203 U.S. 483, 492 (1906)).

CF&lI argues there is no “explicit connector” between

§ 412(n) and the Bankruptcy Code; therefore, we must

apply the “functional examination” to determine if the

1 See 26 U.S.C. § 4971(a), which states:

Initial tax.—For each taxable year of an employer who

maintains a plan to which section 412 applies, there is hereby

imposed a tax of 10 percent (5 percent in the case of a multi-

employer plan) on the amount of the accumulated funding de-

ficiency under the plan, determined as of the end of the plan

year ending with or within such taxable year.

: j

exaction in this case qualifies as a tax. In pursuit of that

examination, it reasons because PBGC is a privately

funded entity, the payment of the minimum benefits con-

tribution cannot possibly be “for the purpose of support-

ing the Government.” Thus, CF&I concludes, those re-

quired payments do not meet the definition of a tax.

In response, the PBGC insists there is a connection

between § 412(n) and the Bankruptcy Code in this case

because, unlike In re CF&I Fabricators (1), the ERISA

provision specifically “connects” to the Bankruptcy Code.

PBGC points to that portion of § 412(n)(4)(C) which

States, “[a]ny amount with respect to which a lien is

imposed . . . shall be treated as taxes . . . and rules similar

to the rules of subsections (c), (d), and (e) of section

4068 of [ERISA] shall apply . . . .” Moreover, § 4068

proceedings, the lien imposed under subsection (a) of this

section shall be treated in the same manner as a tax due

and owing to the United States for purposes of Title 11

weee 29US.C. § 1368(c).

Reading these provisions together, we can see at least a

tangential connection between § 412(n) and the Bank-

ruptcy Code. The deciding question, however, is whether

they constitute an “explicit connection” within the mean-

ing of In re CF&I Fabricators (1). We do not believe

they do.

As we read the Court’s analysis, the key to whether a

Statutory provision is “explicit” in this context is whether

the Bankruptcy Code adopts and makes specific reference

to the provisions of the other law. In re CF&I Fabri-

cators (I), 518 U.S. at 220. In this case, even though

ERISA tangentially refers to “a case under Title 11 or in

insolvency proceedings,” the defect in the statutory con-

struct found in Jn re CF&I Fabricators (1) is still present.

That is, Congress made no specific reference in 11 U.S.C.

§ 507(7) to 29 U.S.C. § 412(n)(4). Asa consequence,

the relationship established between ERISA and the Bank-

ee rn

ruptcy Code is not explicit by definition. Thus, we con-

clude there is no expressed congressional intent that the

“tax treatment” described in § 412 was meant to apply in

the bankruptcy context.

This conclusion takes us into the functional analysis

initiated in In re CF&I Fabricators (I). The quest begins

with City of New York v. Feiring, 313 U.S. 283 (1941),

in which the Court instructed tax priority in bankruptcy

“extends to those pecuniary burdens laid upon individuals

or their property, regardless of their consent, for the pur-

pose of defraying the expenses of government or of under-

takings authorized by it.” Id. at 285 (emphasis added).

As we have noted recently in United Mine Workers 1992

Benefit Plan v. Rushton (In re Sunnyside Coal Co.), No.

97-1276, 1998 WL 380966 (10th Cir. Colo. July 9,

1998), F.3d —— (10th Cir. 1998), this analysis

was sharpened in LTV Steel Co. v. Shalala (In re Chateau-

gay Corp.), 53 F.3d 478 (2d Cir. 1995), which followed

the lead of the Ninth Circuit ? in setting forth four factors

for determining whether contributions required of a debtor

are entitled to tax priority in bankruptcy.* If the contri-

butions are:

1. An involuntary pecuniary burden, regardless of

name, laid upon the individuals or property;

2. Imposed by, or under authority of the legislature;

3. For public purposes, including the purposes of

defraying expenses of government or undertak-

ings authorized by it;

4. Under the police or taxing power of the state;

the contributions have the functionality of a tax and

claims for those contributions are entitled to tax priority.

This analysis disposes quickly of PBGC’s basic contention.

2 See County Sanitation Dist. No. 2 v. Lorber Indus., Inc. (In re

Lorber Indus., Inc.), 675 F.2d 1062, 1066 (9th Cir. 1982).

3 Although the cases do not involve ERISA contributions, we

choose to follow the paradigm because of its rationality.

—

ease tera ren eee ty a a Ne eee

We believe the ERISA contribution fails the third ele-

ment of the Chateaugay test. PBGC admits the contribu-

tions are directed to and for the protection of individual

benefit plans. Thus, the object of the contributions is not

to defray the expenses of the government or any govern-

mental undertaking, but rather, is to finance a private

obligation. Although mandated by statute, there is simply

no credible argument that the required payments fund

either a function of the United States or any of its under-

takings. It thus follows PBGC’s claim for unpaid mini-

mum contributions is not to be accorded tax priority.*

C. Administrative Priority

PBGC next argues if its minimum contributions claim

does not qualify as a priority tax claim, it is still entitled

to a priority administrative claim because the contribu-

tions were “actual, necessary costs and expenses of pre-

serving the estate . . . for services rendered after the

commencement of the case.” 11 U.S.C. § 503(b) (1)

(A). PBGC argues we should be governed by the reason-

ing of Reading Co. v. Brown, 391 US. 471 (1968).

In Reading, a case under the former Bankruptcy Act,

the Court granted administrative priority to a claim for

post-petition “damages resulting from the negligence of

the receiver.” Later cases have expanded this analysis.

See, e.g., Cumberland Farms, Inc. y. Florida Dep’t of

Envtl. Protection, 116 F.3d 16 (1st Cir. 1997) (fine for

# The bankruptcy court and district court both determined PBGC’s

minimum contrbutions claim was not entitled to this tax priority

because the lien of § 412/n) did not arise prior to CF&I’s bank-

ruptey petition. Section 412(n)(4)(B) states the lien imposed

“shall arise on the 60th day following the due date ....” Here.

the due date for CF&I’s minimum contribution was less than 60

days before the Debtors filed bankruptcy: hence, the automatic

stay of bankruptcy would have prevented the lien from arising.

As Debtors insist, “the automatic stay prevented any liens from

affixing, being created, perfected, or enforced.” Our holding here

makes consideration of this point moot,

10a

violation of financial responsibility provision of environ-

mental laws); Alabama Surface Mining Comm'n v. N.P.

Mining Co. (In re N.P. Mining Co.), 963 F.2d 1449 (11th

Cir. 1992) (civil penalties for violations of the Alabama

Surface Mining Act). At a minimum, these cases demon-

strate a judicial willingness to extend administrative claim

status to tortious damages incurred post-petition and statu-

tory penalties in the environmental law arena incurred

post-petition. For PBGC’s argument to succeed, therefore,

the minimum contributions would have to be statutory and

post-petition.

In support of its position that the minimum contribu-

tions are a statutory requirement, PBGC cites the provi-

sion requiring satisfaction of the minimum funding stand-

ard. 29 U.S.C. § 1082(a)(1). PBGC then notes CF&I

was obliged to meet these statutory obligations until the

Plan was terminated and maintains that obligation con-

tinued even during bankruptcy, relying upon In re New

Center Hosp., 200 B.R. 592, 593 (E.D. Mich. 1996)

(“Courts have held that statutory obligations that bind the

debtor will subsequently bind the bankruptcy trustee.”).

PBGC argues this provision makes clear the minimum

contributions claim in this case arises out of a statutorily

required post-petition obligation that could not be aban-

doned.

CF&I responds this contention overlooks the fact the

CF&I pension plan was written, collectively bargained,

relied upon, and was part of the consideration for the

work performed by its beneficiaries in the decades before

its bankruptcy. Moreover, CF&I reminds, the Bankruptcy

Code itself recognizes contributions to pension plans are

compensation for services and, thus, by definition are

contractual in nature. See, e.g., 11 U.S.C. § 507(a)(4)

(granting a fourth priority to “allowed unsecured claims

for contributions to an employee benefit plan... (a)

arising from services rendered within 180 days before the

date of the filing of the petition . . . .” (emphasis added)).

lla

Curiously, PBGC’s own Reply Brief boosts CF&I’s ar-

gument in stating:

In this case CF&I and the USWA bargained for pen-

sion benefits that the company later found it could

not afford. These parties together could have agreed,

either before or after bankruptcy, to terminate the

Pension Plan (“Plan”) voluntarily before contribu-

tions went unpaid and the funding gap widened.

It is evident the plan and the obligations arising from

it were a matter of contractual bargaining and agreement

between an employer and its employees. The fact a stat-

ute provides the means by which they may terminate their

agreement does not trump the contractual nature of the

benefits plan.

Even if we were to assume the contributions were statu-

tory in nature, the Reading line of cases only allows ad-

ministrative priority for post-petition expenses. See In re

Sunarhauserman, Inc., 126 F.3d 811, 817 (6th Cir.

1997) (“To be sure, the Reading rationale allows admin-

istrative expense priority in the absence of a post-petition

benefit to the estate. However, even in Reading and

cases following it, the debt at issue arose post-petition.”).

Hence, the issue devolves to whether the minimum con-

tributions are pre- or post-petition debts.

CF&I argues the claims are “derived from pension

credits under a pension plan, all of which were earned

by pre-petition consideration consisting of the labor of

the pension plan’s participants who did the work that

earned these pensions.” This position rests on the princi-

ple that liabilities are not incurred post-petition simply

because they become due post-petition. See, e.g., Trustees

of Amalgamated Ins. Fund v. McFarlin’s, Inc., 789 F.2d

98, 101 (2d Cir. 1986); LTV Corp. v. PBGC (In re

Chateaugay Corp.), 115 B.R. 760, 775 (Bankr. S.D.N.Y.

1990) (vacated) (“The PBGC’s right to payment upon

termination was, on the petition date, a classic pre-petition

contingent claim. The post-petition termination of the

12a

pension plans did not transform the PBGC’s contingent

pre-petition claims into post-petition claims.”); LTV Corp.

v. PBGC (In re Chateaugay Corp.), 130 B.R. 690, 697

(S.D.N.Y. 1991) (“PBGC’s claims are pre-petition con-

tingent claims because labor giving rise to the pension

obligations was performed pre-petition.”); Jn re Sunar-

hauserman, Inc., 126 F.3d at 819.

In contrast, PBGC points to the Coal Industry Retiree

Health Benefit Act of 1992, 22 U.S.C. §§ 9701-9722,

(Coal Act), and cases in which courts under its provisions

wrestled with bankruptcy priorities, most notable of which

is LTV Co. v. Shalala (In re Chateaugay Corp.), 154

B.R. 416 (S.D.N.Y. 1993), aff'd, 53 F.3d 478 (2d Cir.

1995).

[T]here is no doubt that the charges incurred by

LTV Steel not only are a result of its association

with previous collective bargaining agreements, but

also are a direct consequence of its continued corpo-

rate existence; the Coal Act only imposes obligations

on signatories which are still “in business.” Thus,

the charges stem from LTV Steel’s continued opera-

tion in Chapter 11, and as such are costs of doing

business best classified as “administrative expenses”

within the Bankruptcy Code scheme.

Id. at 422 (footnote omitted).

We do not find the Coal Act cases helpful here. The

nature of the Coal Act claims was fundamentally different

from the claim presented in this case because the Coal

Act claims are entitled to priority as a tax. In re Sunny-

side Coal Co., No. 97-1276, 1998 WL 380966 at *4.

Inasmuch as the contributions in this case are not taxes,

we can draw no parallels from the Coal Act cases that

would apply here.®

5 However, to the extent PBGC’s claims are based on the labor

of the workers during the post-petition period until termination,

they have a post-petition administrative claim. In fact, the bank-

ruptcy court has already allowed that claim.

Een ee Te aT Tet renee |

l3a

Pointedly, asserting a separate interest from that of the

Debtors, Appellee United Steel Workers of America

(USWA)® suggests when Congress wanted to give admin-

istrative priority to claims, it did so by amending the

Bankruptcy Code. In particular, USWA cites 11 U.S.C.

§ 1114, in which Congress provided that payment of

retiree medical benefits due during bankruptcy “has the

status of an allowed administrative expense.” In contrast,

Congress has not amended the Bankruptcy Code to pro-

vide administrative status for the PBGC’s minimum fund-

ing contribution claim. We hold that claim is not entitled

to administrative priority in this case.

D. Valuation of the Unfunded Benefits Claim

We now turn to the problem of valuing the claim for

liabilities that accrued for plan benefits when PBGC termi-

nated the plan. Inasmuch as those liabilities are for bene-

ficiaries’ payments that extend into the future, the amount

of the liability must be reduced to present value so the

debt can be dealt with under the reorganization plan.

While the parties agree to the necessity for such a valua-

tion, they disagree over the methodology to be employed.

The dispute is significant because the proffered methods

produce marked differences of $222,866,000 if PBGC’s

approach is utilized or $124,441,000 if CF&I prevails.

The district court chose the latter, and PBGC claims the

choice was erroneous.

To insure the relative equality of payment between

claims that mature in the future and claims that can be

paid on the date of bankruptcy, the Bankruptcy Code

mandates that all claims for future payment must be

reduced to present value. 11 U.S.C. § 502(b) (“[T]he

court . . . shall determine the amount of such claim in

lawful currency of the United States as of the date of the

6A major portion of the Appeals Fund will accrue to interests

represented by USWA if the judgment of the district court is

affirmed.

datsncimnenesinioncici

14a

filing of the petition... .”). Accepting the need to dis-

count the amount of the claim, the parties disagree only

over the approach to valuation because of two ERISA

provisions,

The first, 29 U.S.C. § 1362(b)(1)(A), provides:

[Liability to [PBGC] shall be the total amount of

the unfunded benefit liabilities (as of the termination

date) to all participants and beneficiaries under the

The second, 29 U.S.C. § 1301(a)(18), defines the

“amount of unfunded benefit liabilities” as:

the excess (if any) of—

(A) the value of the benefit liabilities under

the plan (determined as of such date on the

basis of assumptions prescribed by [PBGC] for

purposes of section 1344 of this title), over

(B) the current value (as of such date) of the

assets of the plan.

PBGC maintains this combination of statutes represents

an express delegation of rule-making power to PBGC to

determine the present value of its claims for terminated

plans. PBGC argues, “Congress mandated that the as-

sumptions used to determine the present value of benefit

liabilities under terminated pension plans be the same

assumptions used for purposes of valuing a plan’s benefits

under 29 U.S.C. § 1344.”7

PBGC relies upon Batterton v. Francis, 432 U.S. 416

(1977), and Chevron v. NRDC, 467 U.S. 837 (1984),

to remind us when Congress delegates rule-making power,

7 Because the liabilities of a terminating benefit plan are usually

satisfied by the plan’s purchase of annuities from private insur-

ance companies, PBGC’s methodology “produces a value of benefit

liabilities in line with prices of insurance company annuity con-

tracts issued to cover such benefits.” The PBGC adjusts the rates

quarterly using data from insurance company annuity price quotes.

15a

the rule enacted has the force of law. In addition, it

maintains the district court should have applied ERISA

as an “external law” to determine the validity and amount

of the claim in bankruptcy. See Landsing Diversified

Properties—lIlI v. First Nat'l Bank & Trust Co. (In re

Western Real Estate Fund, Inc.), 922 F.2d 592, 595-97

(10th Cir. 1990).

Although valid in other contexts, we do not believe

these principles are applicable here. First, as noted by

CF&I, 29 U.S.C. § 1301(a)(18) defines the amount of

unfunded benefit liabilities “for purposes of this title

[ERISA]” only. Therefore, its terms cannot extend to

bankruptcy.

Second, 29 U.S.C. § 1301(a)(18) conflicts with pro-

visions of the Bankruptcy Code, and, as the district court

held, this conflict must be controlled by the Bankruptcy

Code. Indeed, the very action in which the claim arises

is, after all, bankruptcy. Congress has provided very pre-

cise contours of how claims that are administered in Chap-

ter 11 are to be decided, and has pronounced as a cardinal

rule that all claims within the same class must be treated

alike. 11 U.S.C. § 1123(a)(4). That principle would be

violated here if PBGC’s interpretation of § 1301(a)(18)

were adopted because PBGC’s discount rate would apply

only to it and not any other general unsecured creditor.

Congress has made clear when ERISA conflicts with an-

other provision of federal law, ERISA must be subordi-

nated. 29 U.S.C. § 1144(d).

Nothing in the ERISA sections relied upon by PBGC

implies a carry-over into the realm of bankruptcy to allow

PBGC to set its own valuation methodology. Even though

that methodology was adopted in the exercise of PBGC’s

administrative authority, we have no doubt of its inappli-

cability in the world of bankruptcy. The district court did

not err in requiring the bankruptcy court to employ the

prudent-investor discount to reach the present value of

PBGC’s unfunded benefiis liability claim.

The judgment of the district court is AFFIRMED.

l6a

[Filed May 27, 1997]

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF UTAH

CENTRAL DIVISION

No. 93-C-744B

IN RE: CF&I FABRICATORS OF UTAH, INC., et al.,

Reorganized Debtors.

PENSION BENEFIT GUARANTY CORP.,

Appellant & Cross-A ppellee

VS.

REORGANIZED CF&I FABRICATORS OF UTAH, INC., et all.

Appellees & Cross-Appellants

No. 2:96 CV 202B

PENSION BENEFIT GUARANTY CORP.,

Appellant

VS.

REORGANIZED CF&I FABRICATORS OF UTAH, INC., ef al.,

Appellees.

FINAL JUDGMENT

The judgment of the Bankruptcy Court entered on May

21, 1993 is affirmed to the extent provided in this Court’s

decision of November 18, 1994 in No. 93-C-744B, and

17a

the judgment of the Bankruptcy Court entered on Janu-

ary 29, 1996, is affirmed as provided in this Court’s

April 1, 1997 memorandum in No. 2:96 CV 202B.

DATED this 27th day of May, 1997.

/s/ Dee V. Benson

DEE V. BENSON

United States District Judge

18a

[Filed April 1, 1997]

IN THE UNITED STATES DISTRICT COURT

DISTRICT OF UTAH

CENTRAL DIVISION

District Court Case No. 2:96 CV 202 B

PENSION BENEFIT GUARANTY CORPORATION

int,

oe Appellan

REORGANIZED CF&I FABRICATORS OF UTAH, INC., ef al.,

Appellees.

MEMORANDUM DECISION AND ORDER

INTRODUCTION

Appellant Pension Benefit Guaranty Corporation

(“PBGC”) appeals the bankruptcy court’s decision that

the discount rate to be applied in calculating the present

value of unfunded future pension benefit liabilities is the

rate of return a prudent investor would receive for invest-

ing the funds. The sole issue on appeal is whether the

bankruptcy court erred in applying the prudent investor

rate as the appropriate discount rate.

BACKGROUND

On March 19, 1992, PBGC, pursuant to its ERISA

statutory mandate, involuntarily terminated the pension

plan of Appellee CF&I Steel Corporation (“CFI”). In

terminating CFI’s pension plan, PBGC filed specific claims

for the plan’s unfunded future benefit liabilities (“un-

funded claims”). PBGC valued those claims at $222,866,-

000. The Debtors and Unsecured Creditors Committee

objected to PBGC’s valuation of the unfunded claims on

the ground that PBGC improperly inflated its claims by

using an artificially low discount rate.

ee er

a kg la a i aa ial ca

19a

After conducting a three-day evidentiary hearing, the

bankruptcy court found that the 6.5% discount rate for-

mulated and used by PBGC in assessing the present value

of the unfunded claims was appropriate and should only

be modified upon a finding that it was manifestly unfair

or unreasonable. The bankruptcy court concluded the rate

proffered by PBGC was entitled to deference despite the

fact that the PBGC discount rate would negatively impact

the distribution of funds to other similarly situated cred-

itors . Consequently, the bankruptcy court allowed

PBGC’s claims in the amount of $220,953,000.

Both the reorganized debtors and PBGC appealed

various portions of the bankruptcy court’s final order to

this court. After reviewing the bankruptcy court’s final

order, along with the parties’ briefs, this court ruled that

the bankruptcy court erred in subordinating the Bank-

ruptcy Code to ERISA which led the bankruptcy court to

adopt the 6.5% discount rate formulated and used by

PBGC in valuing its unfunded claims. Accordingly, this

court remanded to the bankruptcy court the issue of the

proper discount rate to be applied in valuing PBGC’s un-

funded claims. This court specifically instructed the bank-

ruptcy court to undertake an “independent evaluation” in

ascertaining the appropriate discount rate while conform-

ing to the Bankruptcy Code’s requirement that similarly

situated creditors be treated equally. In re CF & I Fab-

ricators of Utah, Inc., 179 B.R. 704, 710-711 (D. Utah

1994).

On remand, the parties chose not to produce any addi-

tional evidence. The bankruptcy court found that the

6.5% discount rate advocated by PBGC did not conform

to this court’s mandate that the bankruptcy court apply

an independent discount rate consistent with the Bank-

ruptcy Code’s mandate of equality of treatment between

similarly situated creditors. The bankruptcy court, there-

fore, ruled that the only discount rate in evidence that

satisfied the standard established by this court was the

20a

12.3% prudent investor rate. The bankruptcy court,

therefore, revalued PBGC’s unfunded claims at $122,528,-

000 using the prudent investor rate of 12.3%. PBGC

now appeals the bankruptcy court’s use and application

of the 12.3%. PBGC now appeals the bankruptcy court’s

use and application of the 12.3% prudent investor rate.

STANDARD OF REVIEW

On appeals from decisions of the Bankruptcy Court, the

District Court sits as an appellate court. 28 U.S.C. § 158

(a). This court conducts a de novo review of the Bank-

ruptcy Court’s conclusions of law. SLC Ltd. v. Bradford

Group West, 999 F.2d 464, 466 (10th Cir. 1993). Ques-

tions of fact are reviewed for correctness and will not be

disturbed unless there is no reasonable basis to support

them. 7d.

Whether the discount rate formulated and used by the

Bankruptcy Court in determining the present value of the

unfunded claims is compatible with the Bankruptcy Code’s

direction that all similarly situated creditors be treated

equally is a question of law. The only issue on appeal is

whether the prudent investor rate used by the bankruptcy

court in determining the present value of the unfunded

claims comports with the principle of equality required by

the Bankruptcy Code. We, therefore, review de novo the

bankruptcy court’s determination that the prudent in-

vestor approach rate is the only rate in evidence that

satisfies the Bankruptcy Code’s requirement of equality.

DISCUSSION

I. PBGC’s Motion for Reconsideration

PBGC first asks this court to reconsider its previous

decision that “ERISA and the Bankruptcy Code conflict,”

that “ERISA must be subordinated to the Bankruptcy

Code,” and that “the present value calculations relating to

pension termination liability must be determined accord-

ing to bankruptcy law.” Jd. at 710.

ee eT me - —— wigs iia eas

21a

Rule 59 of the Federal Rules of Civil Procedure pro-

vides, “Any motion to alter or amend a judgment shall be

filed no later than 10 days after entry of the judgment.”

Fed. R. Civ. P. 59(e). Similarly, the Bankruptcy Code

provides, “Unless the district court . . . by local rule or by

court order otherwise provides, a motion of rehearing may

be filed within ten days after entry of the judgment of the

district court.” Bankr. R. 8015. This court entered its

decision on November 18, 1994. PBGC has never, until

now, moved this court to reconsider its November 18,

1994 decision. PBGC’s request that this court reconsider

its previous ruling is untimely. Accordingly, this court

declines to reconsider its November 18, 1994 decision.

II. Propriety of the Prudent Investor Rate

The bankruptcy court originally applied the 6.5% dis-

count rate formulated and advanced by PBGC without

analyzing any of the rates proffered by the debtors. On

appeal, this court directed the bankruptcy court to apply

an independent rate that “advance[d] the principle of

equality of treatment between similarly situated creditors.”

In re CF & I, 179 B.R. at 710. On remand, the bank-

ruptcy court found that the 6.5% rate proffered by PBGC

was creditor specific to PBGC and, therefore, was incon-

sistent with fundamental principles of federal bankruptcy

law. The bankruptcy court also found that the prudent

investor rate was the only discount rate in evidence that

satisfied the Bankruptcy Code’s requirement that all

similarly-situated creditors be treated equally. Therefore,

the bankruptcy court adopted and applied the 12.3%

prudent investor rate in determining the present value of

the unfunded claims.

PBGC argues that the bankruptcy court erred in reject-

ing its 6.5% discount rate and in applying the prudent

investor rate. This court disagrees with PBGC’s conten-

tion. The bankruptcy court was correct in concluding

that the 6.5% rate advocated by PBGC is creditor specific.

22a

The 6.5% discount rate advanced by PBGC is based

upon PBGC’s efforts to replicate “the market price from

an insurance company for the close-out annuities from a

terminated pension plan.” In re CF & I, No. 90B-6721

at 4 (Bankr. D. Utah November 27, 1995). The bank-

ruptcy court specifically found that “the price of a close-

out annuity does not reflect the future earning power of

money, but instead serves to promote the PBGC’s own

institutional goal of making plan termination less attrac-

tive than the purchase of close-out annuities.” In re CF

& I, No. 90B-6721 at 9 (Bankr. D. Utah November 27,

1995). That goal is inconsistent with ascertaining the

true present value of the unfunded claims.

If the court were to apply PBGC’s proposed 6.5%

discount rate, PBGC could obtain a windfall at the ex-

pense of other similarly situated creditors. The unfunded

claims could be discounted at the low 6.5% rate and

then reinvested by PBGC in the market at the higher

12.3% prudent-investor rate. Such a result would unfairly

benefit PBGC by inflating their claims while negatively

impacting the distribution of funds to other similarly situ-

ated creditors. If PBGC were allowed to value their

claims at the 6.5% discount rate, creditors behind PBGC

would only be allowed to collect after PBGC’s $212,286,-

000 claim was satisfied. If the claims were valued at the

12.3% rate those creditors would only have to wait until

the debtors satisfied their $124,441,000 claim to PBGC.

The prudent investor approach, on the other hand, is

based upon the investor’s objective of earning “the high-

est return On the invested capital consistent with preser-

cation of the capital and minimizing of risk.” In re

Chateaugay Corporation, 126 B.R. 165, 176 (S.D.N.Y.

1991). The objective of the prudent investor approach

is to determine the amount of money a prudent investor

needs today to fund future payments to participants in

the terminated plans. Jd. The prudent investor approach

is “used by financial analysts every day to determine the

4 med on Sah

23a

present value of long term obligations” and is “realisti-

cally likely to result in the determination of the full eco-

nomic value of the claim.” Jd. at 175-76. Consequently,

the Chaeaugay court held that the reasonable prudent

investor approach was the most appropriate for valuing

PBGC’s claims in that case.

We agree with the bankruptcy court that the 12.3%

prudent investor rate is the only rate in evidence com-

patible with the Bankruptcy Code. It is based on com-

mony accepted techniques and is readily and objectively

verifiable. It is regularly used by financial analysts in

determining the present value of long-term obligations.

The 12.3% discount rate is more than fair considering

the 16.6% average rate of return on CFI’s pension plan

over the past seven years. Tr. of Craft’s Test. at 180.

Finally, it satisfies this court’s prior holding that present

value calculations must be determined according to bank-

ruptcy law, including “the principle of equality of treat-

ment between similarly situated creditors.” In re CF & I,

179 B.R. at 710.

Appellant’s contention that the prudent investor ap-

proach will not enable PBGC to account for immediate

cash draws against the fund is without merit. The bank-

ruptcy court specifically found that “cash needs” could

be satisfied by a number of sources including cash on

hand, cash earnings on the investment portfolio itself or

liquidation of stocks and bonds held by the portfolio.”

In re CF & I, No. 90B-6721 at 12 (Bankr. D. Utah

1995).

The bankruptcy court was correct in determining that

the 6.5% discount rate formulated and advanced as the

proper rate by PBGC is creditor specific and fails to com-

ply with this court’s mandate that the discount rate applied

in determining the present value of the unfunded claims

treat similarly situated creditors equally. The bank-

ruptcy court's finding that the 12.3% prudent investor

rate was the ony discount rate in evidence that satisfied

24a

this court’s mandate of equality among creditors was cor-

rect. Accordingly, the bankruptcy court’s determination

that the 12.3% prudent investor rate was the appropriate

rate to apply in determining the present value of the un-

funded claims is AFFIRMED.

DATED this Ist day of April, 1997.

/s/ Dee Benson

DEE BENSON

United States District Judge

25a

[Filed Jan. 26, 1996}

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF UTAH

CENTRAL DIVISION

Jointly Administered Under Case No. 9JOB-6721 [sic]

IN RE: CF&I FABRICATORS OF UTAH, INC., et al.,

Reorganized Debtors

Chapter 11

(Case No. 90B-6721)

(CF&I Fabricators of Utah, Inc.)

(Case No. 90B-6722)

(Colorado & Utah Land Company)

(Case No. 90B-6723)

(Kansas Metals Company)

(Case No.90B-6724 )

(Albuquerque Metals Company)

(Case No. 90B-6725)

(Pueblo Metals Company)

(Case No. 90B-6726)

(Denver Metals Company)

(Case No. 90B-6727)

(Pueblo Railroad Service Company)

(Case No. 90B-6728 )

(CF&I Fabricators of Colorado, Inc.)

(Case No. 90B-6729 )

(CF&I Steel Corporation )

(Case No. 90B-6730)

(Colorado & Wyoming Railway Company)

ORDER ON MOTION OF PENSION BENEFIT

GUARANTY CORPORATION,

DATED JANUARY 5, 1996,

FOR ENTRY OF JUDGMENT

26a

The Motion of Pension Benefit Guaranty Corporation

dated January 5, 1996, for Entry of Judgment was heard

by this Court on January 26, 1996. Appearances of coun-

sel were made upon the Court record. Based upon this

Court’s Memorandum Decision on Motions for Judgment

filed By Pension Benefit Guaranty Corporation Dated

3/7/95, and Reorganized Debtors’ Dated 4/11/95, re-

lated to Twenty Amended Proofs of Claim filed by Pen-

sion Benefit Guaranty Corporation, and to resolve all

issues of compliance with Rule 9021, Federal Rules of

Bankruptcy Procedure, it is hereby

ORDERED that Pension Benefit Guaranty Corpora-

tion’s unfunded benefit claims are revalued, utilizing a

12.3% discount rate, at $124,441,000.00 (less recovery

by Pension Benefit Guaranty Corporation on duplicative

claims), resulting in general unsecured claims each in the

sum of $122,528,000.00.

Dated this 26th day of January, 1996.

United States Bankruptcy Court

/s/ Judith Boulden

HONORABLE JUDITH BOULDEN

United States Bankruptcy Judge

27a

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF UTAH

CENTRAL DIVISION

Bankruptcy Number 90B-6721

Chapter 11

IN RE: CF&l FABRICATORS OF UTAH, INC., et al.,

Reorganized Debtor(s).

Case Number 90B-06721

CF&I Fabricators of Utah, Inc.

Case Number 90B-06722

Colorado & Utah Land Co.

Case Number 90B-06723

Kansas Metals Company

Case Number 90B-06724

Albuquerque Metals Company

Case Number 90B-06725

Pueblo Metals Company

Case Number 90B-06726

Denver Metals Company

Case Number 90B-06727

Pueblo Railroad Service Co.

Case Number 90B-06728

CF&I Fabricators of Colorado, Inc.

Case Number 90B-02769

CF&I Steel Corporation

Case Number 90B-06730

The Colorado and Wyoming Railway Company

28a

MEMORANDUM DECISION ON MOTIONS FOR

JUDGMENT FILED BY PENSION BENEFIT

GUARANTY CORPORATION DATED 3/7/95,

AND REORGANIZED DEBTORS DATED 4/11/95,

RELATED TO TWENTY AMENDED PROOFS

OF CLAIM FILED BY PENSION BENEFIT

GUARANTY CORPORATION

This court previously ruled on certain issues related to

the claims objections, brought by these now reorganized

Chapter 11 debtors (Debtors) and the Official Unsecured

Creditors Committee, to twenty amended proofs of claim

filed by the Pension Benefit Guaranty Corporation (the

PBGC). At the time these chapter 11 petitions were filed,

the Debtors were sponsors, and CF&I Steel Cororation

(CF&l) was the administator, of two pension plans

that provided pension and pension-related benefits for

employees and retirees. The two pension plans were The

Pension Plan of CF&I Steel Corporation and Certain Sub-

sidiaries (the Master Plan) and The Non-Contributory

Pension Plan of CF&I Steel Corporation as Amended and

Restated Effective January 1, 1989. Under these pension

plans, CF&I was obligated to provide annual plan funding

contributions based on the actuarial valuation of the bene-

fits earned by its employees. CF&I failed to make the

minimum funding payment that became due on the Master

Plan on September 15, 1990, and filed the within chapter

11 cases on November 7, 1990. On March 1, 1992, the

PBGC instituted proceedings to terminate the Master Plan

and became the successor trustee and thus liable for

guaranteed benefits to plan participants.

The PBGC filed two proofs of claim against each of

the Debtors. The claims fell into two general categories:

(1) claims for due and unpaid minimum contributions

allegedly due and owing the Master Plan (the Minimum

Contribution Claims) of $64,874,511 each, and (2)

an eee find

29a

claims for unfunded benefit liabilities under the Master

Plan (the Unfunded Benefit Claims) of $212,286,000

each (collectively the PBGC’s Claims). The $212,286,000

figure allegedly represented the present value of liability

on the date the Master Plan was terminated, less the value

of plan assets on that same date, and less the value of the

unpaid Minimum Contribution Claims.

In a memorandum decision of November 9, 1992, this

Court allowed the PBGC’s Claims against the Debtors on

a joint and several basis, but ruled that certain portions

of the PBGC’s Claims were not entitled to the status as-

serted by the PBGC. The court reserved for an eviden-

tiary hearing the allowed amount of the PBGC’s Claims,

whether there existed any equitable grounds for the court

to modify the present value of a portion of the PBGC’s

Claims, and the extent to which the PBGC’s Claims were

duplicative. After the evidentiary hearing on the remain-

ing factual issues, by order of December 31, 1992, this

Court ruled (among other things) that the Unfunded

Benefit Claims would be calculated and allowed utilizing

a 6.5% interest rate as one of several factors set forth in

29 C.F.R. § 2619 (1991) (Regulation) that was in effect

as of the date of the termination of the Master Plan. The

Regulation was supposed to determine the value of plan

benefits under terminating pension plans by figuring the

current value of projected benefits as of a specific date

that was equal to the amount of money needed on that

date to pay benefits over future years. The Regulation

required the plan administrator to determine the present

value of all plan benefits using the applicable formulas

contained in the Regulation, together with prevailing

PBGC factors, including interest expected retirement age,

and mortality rates in effect on the valuation date. On

May 21, 1993, after denying a motion for reconsideration

filed by the PBGC, this Court allowed the PBGC’s re-

calculated Unfunded Benefit Claims as general unsecured

claims in the amount of $220,953,000, and incorporated

30a

the prior orders of November 9, 1992 and December 31,

1992 by reference.

The parties filed cross-appeals, with the PBGC challeng-

ing this Court’s ruling on a number of issues unrelated

to this opinion. The Reorganized Debtors and the United

Steelworkers of America, AFL-CIO-CLC, (United Steel-

workers) appealed portions of this Court’s rulings related

(among other things) to whether this Court improperly

gave deference to the PBGC’s method of discounting its

Unfunded Benefit Claims to present value.

By Opinion dated November 17, 1994, the United

States District Court for the District of Utah affirmed all

aspects of this Court’s prior decisions, except with respect

to whether this Court gave undue deference to the PBGC’s

determination of the method and discount rate to be ap-

plied to the Unfunded Benefit Claims. The District Court

found that where, as in this case, ERISA and another

federal statute conflict, ERISA must be subordinated.

The District Court determined that because the Bank-

ruptcy Court has an additional mandate to advance the

principle of equality of treatment between similarly situ-

ated creditors, ERISA must be subordinated to the Bank-

ruptcy Code, and the present value calculations relating

to pension termination liability must be determined accord-

ing to bankruptcy law.2, The matter was remanded with

1 ERISA states that “[nlothing in this title shall be construed

to alter, amend, modify, invalidate, impair, or supersede any law

of the United States ... or any rule or regulation issued under

any such law.” 29 U.S.C. § 1144(d) (1985).

2 The District Court held this Court applied the wrong standard

of review in giving deference to the PBGC’s interpretation, and the

“application of an improper standard of review may have prevented

the bankruptcy court from fulfilling its statutory obligation to in-

dependently ascertain an appropriate discount rate. The bank-

ruptey court’s legal conclusion that deference was due PBGC’s in-

terpretation is reversed and remanded to the bankruptcy court to

make an independent evaluation.” Opinion dated November 17,

1994 at 14 (emphasis added).

3la

the instruction that this Court make an independent dis-

count rate determination without any deference to the

position of the PBGC.

The PBGC then filed a Motion for Judgment in this

Court requesting judgment in favor of the PBGC by allow-

ing its Unfunded Benefit Claims as general unsecured.

claims in the amount of $220,953,000. The PBGC as-

serted that this Court’s prior findings that the PBGC’s

Regulation replicated the market price from an insurance

company for the close-out of annuities from a terminated

pension plan was the correct test to apply in determining

the appropriate discount rate. The PBGC also argued

that the Reorganized Debtors’ prudent-investor approach,

failed on its own terms because the hypothetical pension

plan portfolio had no cash reserve, and there was no con-

sideration of how that may affect yield. Based on the

reiterative method for placing a value on the PBGC’s

Separate claim for unpaid minimum funding contributions

and additional evidence submitted on that discrete issue

on January 11, 1993, the PBGC asserted this Court’s final

order entered on May 21, 1993, that allowed the un-

funded benefit liabilities claim in the amount of $220,-

953,000 waé correct.

The Reorganized Debtors, supported by United Steel-

workers, filed a cross-motion seeking judgment in favor

of the Reorganized Debtors by revaluing the Unfunded

Benefit Claims as general unsecured claims in the amount

of $124,441,000 less any duplicate recovery by the

PBGC. The Reorganized Debtors and United Steelwork-

ers argued that the PBGC’s proposed discount rate as-

sumption was intended to satisfy policy goals under

ERISA and was inconsistent with the Bankruptcy Code,

that use of the PBGC’s proposed discount rate would gen-

erate profit for the PBGC at the expense of other unse-

cured creditors, and, the only market-based discount rate

consistent with the Bankruptcy Code established by com-

petent evidence at trial was a 12.3% discount rate calcu-

——

32a

lated utilizing a prudent-investor method presented by the

Reorganized Debtors.

The Court heard oral argument on both motions,

whereupon the matter was taken under advisement. This

Court has now reviewed the parties arguments and mem-

oranda, the transcripts from and evidence received at the

prior evidentiary hearing, and has made an independent

review of applicable case law. In consideration of the

District Court’s Opinion dated November 17, 1994, this

Court now rules as follows:

ISSUES

This Court must determine the appropriate discount

rate to be used to value the PBGC’s Unfunded Benefit

Claims in today’s dollars, giving no deference to the

PBGC’s methodology and treating similarly situated cred-

itors equally. All parties appear to agree that an unse-

cured claim for future payments must be discounted to

present value to avoid over-compensation to a creditor

resulting from the interest earning power of money. How-

ever, the PBGC asserts that a creditor-specific method-

Ology should be used to calculate present value, whereas

the Reorganized Debtors and United Steelworkers assert

the appropriate approach is one that is non creditor-

specific.

The PBGC argues, without supporting case law, for

the cost of settlement approach. This approach is based

on generally accepted accounting principles* and looks

to the real-world cost of retiring actual pension fund li-

abilities in the close-out annuity market. The PBGC ar-

gues that no better source of valuation evidence exists

than the active competitive market where insurers offer

to take on unconditional and guaranteed obligations.

3 The PBGC specifically relies on a proncement [sic] promulgated

by the Financial Accounting Standards Board as set forth in the

Statement of Financial Accounting Standards No, 87 (FAS 87).

ee ee

33a

The Reorganized Debtors and United Steelworkers ask

the Court to adopt the reasoning of Judge Lifland from

the Southern District of New York, in a reported but va-

cated and withdrawn decision. They argue that the Court

should utilize a prudent investor approach that produces

a discount rate based on the following three criteria: (1)

the rate should yield the true economic value of the claim;

(2) the rate should be established by market value; and

(3) the rate should be consistent with the principle of

equality of distribution to unsecured creditors, citing LTV

Corp. v. Pension Benefit Guar. Corp. (In re Chateaugay

Corp.) 126 B.R. 165, 174 (Bankr. S.D.N.Y. 1991), va-

cated on consent of the parties, 17 Employee Benefits Cas.

(BNA) 1102 (S.D.N.Y. 1993) (LTV IT).*

The PBGC bears the ultimate burden of proof as to

the validity and the amount of its claim. Jn re Harrison,

987 F.2d 677, 680 (10th Cir. 1993). It must prove its

claims by a preponderance of the evidence. In re Lewis,

80 B.F 39, 41 (Bankr. E.D.Pa. 1987). Accordingly and

in light of the District Court’s Opinion dated November

17, 1994, in order to prevail, the PBGC must present evi-

dence of a discount rate that is both consistent with the

Bankruptcy Code and one that will yield the present value

of its Unfunded Benefit Claims in today’s dollars. The

District Court instructed that the rate must be consistent

with the Bankruptcy Code and its principle of equality of

distribution among similarly situated creditors and that the

policy objectives of ERISA must be subordinated to the

Bankruptcy Code.

—— -

4 Although not controlling, the Court finds instructive the opinion

of Judge Lifland in Chateaugay, which is directly on point. The

parties disagree, however, on the extent to which this Court should

consider the criteria set forth in that opinion. The Reorganized

Debtors and United Steelworkers urge its complete adoption by

this Court while the PBGC asserts this Court should reject it whole

heartedly in favor of the cost of settlement approach.

34a

ANALYSIS

The Court is unaware of any controlling authority

setting a standard for discounting claims arising from

the termination of a debtor’s pension fund to present value.

Although in the context of bankruptcy, discounting a cred-

itor’s claim of future damages to present value is not

unusual,® few cases deal with discounting an unsecured

Stream of future payments.* The concept is nonetheless

essential to equitable distribution among creditors. In re

O.P.M. Leasing Services, Inc. 79 B.R. 161, 165-67

(S.D.N.Y. 1987) (court measured creditor/lessee’s claim

requesting reimbursement for percentage of lump sum

termination payment based on deprivation of future bene-

fits in accordance with accepted contract law principles

and discounted to present worth): Jn re Winston Mills,

Inc., 6 B.R. 587, 599-60 [sic] (Bankr. S.D.N.Y. 1980) (a

reduction to present value of a stream of future payments

has been accepted without question and is axiomatic in

the determination of future payments of rent reserved in

a lease). In contexts other than bankruptcy, federal courts

often discount a future stream of payments to present value

to prevent the injured party from obtaining an overpay-

ment as a result of the prepayment of a claim. For ex-

ample, federal courts routinely take into account. the

5 Historically, establishing damages for termination of real prop-

erty leases at less than full payment of the lease over time has

been found by the Supreme Court to be fundamental to the bank-

ruptcy process designed to relieve reorganizing corporate debtors

of continuing liability yet allow landlords to participate in distribn-

tion. See Kuehner v. Irving Trust Co., 299 U.S. 445, 453-55 (1987)

(limiting damages to three times the annual rent of rejected real

property lease under Section 77B of the Bankruptcy Act held not

to be a taking of property without due process).

6 Most cases determine the discount rate that should be applied

to enable a claimant to receive deferred cash payments totaling at

least the allowed amount of a claim in the context of a plan of

reorganization under 11 U.S.C. § 1129(b)(2) and § 1325(a)(5). See

e.g., In re Hardzog, 901 F.2d 858, 859-60 (10th Cir. 1990).

hae Ee NR PEO ge anal hil ld bp

35a

earning power of money when determining the award of

damages necessary to compensate for lost future income.

E.g., Chesapeake & Ohio Ry. Co. v. Kelly, 241 US.

485 (1916). Although these courts consider various

factors in arriving at a discount rate, the primary consid-

eration is what rate will yield a reasonably safe, long-term

investment available to the average person.?

The PBGC has failed to present any case law employ-

ing a creditor-specific approach to determine the appro-

priate discount rate. Therefore, this Court must determine

if the approach advocated by the PBGC in attempting to

meet its burden of proof is violative of Bankruptcy Code

policy considerations to give equal treatment to all sim-

ilarly situated unsecured creditors, or inconsistent with

case law in this circuit. Upon due consideration, this Court

finds the creditor-specific approach advocated by the PBGC

is inconsistent with Bankruptcy Code_standards of equal

creditor treatment.

The PBGC’s proposed discount rate assumption is in-

tended to satisfy policy goals under ERISA and is

ee ne

7 St. Louis Southwestern Ry. Co. v. Dickerson, 470 U.S. 409, 412

(1985) (no single method for determining present value is man-

dated by federal law and the method of calculating present value

should take into account inflation and other sources of wage in-

creases as well as the rate of interest); Hoskie v. U.S., 666 F.2d

1353, 1355 (10th Cir. 1981) (the court must calculate an amount

of money that can be invested in a reasonably safe long-term in-

vestment available to the average person, which ultimately will yield

a sum equal to plaintiff’s lost income over the span of hig working

life expectancy); Steckler v. U.S., 549 F.2d 1372, 1878 (10th Cir.

1977), cert. denied, 290 U.S. 657 (1933) (trier of fact should take

into account estimated changes in the purchasing power of money,

and at the same time discount the future income stream to its

present value); Southern Pac. Co. v. Klinge, 65 F.2d 85, 87 (10th

Cir. 1933) (the jury should determine from the evidence what in-

terest could be fairly expected from safe investment which a person

of ordinary prudence, but without particular financial experience

or skill could make in that locality).

a A ii a

36a

inconsistent with the underlying principles of the Bank-

ruptcy Code.

This Court previously ruled that the PBGC had prop-

erly calculated the Unfunded Benefit Claims according to

the Regulation, including the utilization of the PBGC’s ex-

pected retirement age. Upon review, this Court sees no

basis to modify that portion of the ruling finding that the

PBGC accurately calculated its claim according to its

Regulation. However, as this Court previously ruled, the

Regulation is designed to produce a price that would be

charged by the private sector in issuing an annuity to a

particular group of lives. Replication of a private annuity

contract, however, is only relevant to the valuation of

liabilities under ERISA. The evidence indicates the Regu-

lation serves to minimize any incentive of an employer

to close-out a terminating pension plan by transferring

liabilities to the PBGC, rather than by purchasing a pri-

vate insurance company annuity. The PBGC’s efforts to

replicate the price of a close-out annuity does not reflect

the future earning power of money, but instead serves to

promote the PBGC’s own institutional goal of making

plan terminations less attractive than the purchase of close-

out annuities.

This Court’s prior ruling also incidated that the rate

used to determine the present value of the PBGC’s Claims

should take into consideration, not a risk-free rate, but at

least a rate that was consistent with the PBGC’s obliga-

tions to ensure that payments will be made to pensioners.

That ruling was in error because it considered a creditor-

specific element to the detriment of other unsecured credi-

tors. Since the District Court ruled that all similarly situ-

ated creditors should be treated the same, such factors as

the recognition of the PBGC’s obligation to guarantee

performance on all defaulted pension plans, its obligation

to provide conservative investment management, and the

prior ruling that the PBGC’s rate should be disallowed

only if there is manifest unfairness or unreasonableness,

is incorrect.

37a

The PBGC’s discount methodology does not yield a

discount rate.

This Court’s prior ruling found that the PBGC’s dis-

count methodology yielded a discount factor, not an in-

terest rate. The discount factor had significance only in

conjunction with the PBGC’s other actuarial assumptions

set forth in the Regulation. A review of the evidence

indicates that the discount factor is not a rate with in-

dependent economic significance, but only a mathematical

by-product of the PBGC’s effort to replicate the price of

private annuity contracts. It is created by the division of

the mortality table values into the annuity purchase price

that then equals the discount factor. Because the discount

factor is “derived,” it has no economic significance inde-

pendent of the PBGC’s survey of annuity prices and appli-

cation of its mortality tables to the annuity pricing infor-

mation. Since such an application serves only the unique

characteristics of the claimant, it is not a reliable source

to calculate the present value of the Unfunded Benefit

Claims.

In its prior ruling, this Court also ruled that use of the

PBGC’s regulations to calculate its Unfunded Benefit

Claims would have a significant adverse impact on the

claims of other unsecured creditors. However, this Court

ruled that the use of the Regulation would be disallowed

only if the calculation of the PBGC’s Claims were un-

justifiably inflated to the detriment of the balance of the

creditors. Since the District Court has determined that no

deference should be given to the PBGC’s determination

of the appropriate discount rate, the rejection of that de-

termination only if it unjustifiably inflates the PBGC's

Claims, is incorrect.

The only market-based discount rate consistent with the

Bankruptcy Code estabilshed by competent evidence at

trial was the rate presented by the Reorganized Debtors.

The evidence indicated that the discount factor em-

ployed by the PBGC was not representative of future

38a

investment yields or any rate of return. The Regulation

does not consider expected interest earnings of a prudent-

investment portfolio, or a reasonably safe long-term in-

vestment. The objective of the Reorganized Debtors’

prudent-investor approach was to determine the amount

of money a prudent investor needed today to fund the

required future payments to participants.’ The Court pre-

viously found that the Reorganized Debtors’ prudent-

investor approach was carefully developed analyzing gen-

erally accepted source materials used in financial markets.

It was presented by a witness who was a qualified expert

on the present value of claims in bankruptcy cases.

The prior ruling criticized the prudent-investor approach

on several grounds. Included in that criticism was that

the prudent-investor approach assumed a risk factor that

was inconsistent with the PBGC’s statutory role as a

guarantor of pension funds, and that it failed to provide

adequate compensation to the PBGC for the assumption

of additional risk. This Court finds those criticisms to be

incorrect in light of the District Court’s ruling because

they improperly focus on the unique characteristics of the

PBGC as a special creditor, as opposed to merely one of

a class of unsecured creditors. This Court also criticized

the prudent-investor approach because it produced a dis-

count rate that was generally higher than that projected

by many large pension plans. Again, this comparison is

invalid because it focuses on a methodology utilizing

accounting principles unique to the calculation of pension

expenses and obligations to determine pension costs.

The most significant criticism of the prudent-investor

approach was that the investment portfolio mix failed to

include cash resources required to pay obligations due in

——e

8In its prior ruling, this Court rejected the “debtor-specific”

approach for discounting the PBGC’s Claims to present value, Upon

review, this Court finds no basis to modify that ruling.

39a

the near future. This Court reasoned that either the hypo-

thetical portfolio would have to be partially liquidated to

meet current obligations, or that the PBGC would have

to use its other assets to meet immediate cash obligations

under CF&l’s terminated plan. A careful review of the

evidence indicates that cash needs could be satisfied by a

number of sources including cash on hand, cash earnings

on the investment portfolio itself, or liquidation of stocks

and bonds held by the portfolio. In addition, the hypo-

thetical portfolio should have a zero balance at the con-

clusion of payments to retirees.

The Court previously found the lack of cash resources

placed the prudent-investor approach in doubt. Upon

reconsideration, there is insufficient evidence to indicate

that the hypothetical portfolio generating a 12.3% dis-

count rate could not meet future obligations. Although it

appears the necessity to meet cash obligations in the near

future could significantly impact the future earnings of

the hypothetical portfolio, the extent of the impact is not

before the court. The Court will not speculate, in the

absence of specific evidence, that the lack of cash re-

sources invalidates the prudent-investor approach.

The prudent-investor approach, even if less than per-

fect, is the only discount rate before the Court that comes

close to meeting the standard articulated by the District

Court. To accept the PBGC’s argument that the discount

rate is inextricably bound to the actuarial assumptions

used to calculate the aggregate future pension liabilities

is to accept PBGC’s original position that ERISA’s policy

objectives must be satisfied at the expense of the policy

goals of the Bankruptcy Code. Since the Court now re-

jects that argument, the PBGC’s assertion that the prudent-

investor approach analyzed the wrong market is also re-

jected, Because the PBGC has failed to carry its burden

of proof by a preponderance of the evidence, it is hereby

ORDERED, that the PBGC’s Unfunded Benefit Claims

are revalued utilizing a 12.3% discount rate at $124,-

40a

441,000 (less any recovery by the PBGC on duplicative

Claims).

DATED this 27th day of November, 1995.

/s/ Judith A. Boulden

JubItH A. BOULDEN

United States Bankruptcy Judge

4la

[Filed Nov. 18, 1994]

IN THE UNITED STATES DISTRICT COURT

DISTRICT OF UTAH

CENTRAL DIVISION

Civil No. 93-C-744B

IN RE: CF&I FABRICATORS OF UTAH, INC., et al.,

Reorganized Debtors.

PENSION BENEFIT GUARANTY CORPORATION,

Appellant and

Cross-A ppellee,

VS.

REORGANIZED CF&I FABRICATORS OF UTAH, INC., et al.:

and UNITED STEELWORKERS OF AMERICA, AFL-CIO-CLC,

Appellees and

Cross-A ppellants.

OPINION

This bankruptcy appeal came before the Court on

Wednesday, October 26, 1994. Susan E. Birenbaum,

Israel Goldowitz, Garth D. Wilson, Mare A. Tenenbaum,

and William G. Fowler represented the appellant and

cross-appellee, Pension Benefit Guaranty Corporation

(“PBGC”). Frank Cummings, Scott A. Faust, Steven J.

McCardell, and Steven J. Waterman represented appellees

and cross-appellants Reorganized CF&I Fabricators of

Utah, Inc., et al. (“Debtors” or “Reorganized Debtors”),

Richard M. Seltzer and Richard Brook represented ap-

42a

pellee and cross-appellant United Steelworkers of America,

AFL-CIO-CLC (“United Steelworkers”).

BACKGROUND

This appeal and cross-appeal concern liabilities arising

from the pension plan (“the Plan”) administered by the

Reorganized Debtors prior to their filing of chapter 11

petitions. The Plan obligated the Reorganized Debtors

to pay fixed pension benefits calculated according to the

pay and years of service of each recipient former em-

ployee. The Employee Retirement Income Security Act

(“ERISA”) required the Reorganized Debtors to make

annual funding contributions to PBGC based on the actu-

arial valuation of the benefits the employees earned.

PBGC is a corporation owned by the federal government

that was established under ERISA to administer pension

plan termination and to guarantee payment of certain

benefits under terminated pension plans. 29 U.S.C. § 1302

(1985 & Supp. 1994). PBGC obtains funding for its

administrative expenses and benefit payments by collect-

ing minimum funding contributions from pension plans,

generating investment income, allocating the assets of

terminated plans, and recovering on its claims against the

administrators of terminated plans. PBGC does not re-

ceive general federal revenue. The claims under which

PBGC can recover include those for (1) unpaid minimum

funding contributions and (2) the amount by which

PBGC’s benefit payments exceed the value of the Plan’s

assets at termination (known as “unfunded benefit lia-

bilities”).

The Reorganized Debtors failed to make the minimum

funding contribution due on September 15, 1990. The

Reorganized Debtors filed petitions for reorganization

under chapter 11 on November 7, 1990. At the time of

filing, the Plan was underfunded by about $200 million.

The Reorganized Debtors maintained control ow ~ the

Plan for about another year but failed to make the mini-

43a

mum funding contributions. On March 19, 1992, PBGC

terminated the Plan, and PBGC became the Plan’s trustee.

PBGC began making payments to beneficiaries of the

Plan,

PBGC asserted claims in the bankruptcy court for ap-

proximately $71 million in unpaid minimum funding con-

tributions and for approximately $222 million for un-

funded benefit liabilities. PBGC argued that its claims

were entitled to priority under ERISA and the Internal

Revenue Code (“I.R.C.”).

In decisions dated November 9, 1992 and December

31, 1992, the bankruptcy court denied PBGC’s claim of

tax priority on all but a small portion of the amount

it sought. Specifically, the decisions included the follow-

ing holdings that are relevant to this appeal:

* PBGC’s claims for unpaid mandatory contributions

are not entitled to administrative expense priority under

11 U.S.C. § 503(b)(1)(B) or tax priority pursuant to

11 U.S.C. § 507(a)(7) because the automatic stay pre-

cluded the imposition of a lien.

* PBGC’s claims for minimum funding contributions

arose pre-petition because the acts giving rise to the

Debtors’ liability to make those contributions occurred

pre-petition.

* PBGC’s claims for minimum funding contributions

are not entitled to post-petition interest as administrative

claims because those contributions were not actual and

necessary expenses of preserving the Debtors’ estates.

* PBGC’s claim for a $3 million portion of the un-

funded benefit liabilities is not entitled to tax priority

because the termination of the Plan occurred post-petition,

and the automatic stay precluded the imposition of the

lien provided for by ERISA section 4068(c)(2), 29

U.S.C. § 1368(c)(2).

* PBGC is not entitled to interest on its claims for

minimum funding contributions because those contribu-

44a

tions are not post-petition taxes and because administra-

tive expenses are not entitled to interest.

The bankruptcy court’s decisions also included the fol-

lowing holdings that are relevant to the cross-appeal:

* PBGC’s determination of the valuation of its claims

is entitled to deference, and that determination is entitled

to “substantial weight” when the court determines whether

to allow claims.

* PBGC’s claim for minimum funding contributions

is disallowed to the extent that it duplicates PBGC’s claim

for unfunded benefit liabilities.

* Each of the Debtors is jointly and severally liable

under ERISA § 4062(a), 29 U.S.C. § 1362(A) [sic].

Following the bankruptcy court’s decision, the Debtors

emerged from bankruptcy pursuant to a consensual re-

organization plan. That plan established reserve funds for

the purpose of funding PBGC’s recovery in the event it

prevails on this appeal. Only those reserve funds will be

affected by the outcome of this appeal. PBGC estimates

that its losses resulting from the termination of the Plan

will be approximately $250 million.

ISSUES ON APPEAL

I. Tax Priority Status of Claim for Minimum Funding

Contributions

PBGC argues that the bankruptcy court erred in con-

cluding that its claims for unpaid mandatory contributions

are not entitled to administrative expense priority under

11 U.S.C. § 503(b)(1)(B) or tax priority pursuant to

11 U.S.C. §507(a)(7). The bankruptcy court found

that, although ERISA and the I.R.C. provide for a lien

to be automatically imposed 60 days after the amount of

unpaid contributions exceeds $1,000,000, the operation

of the Bankruptcy Code’s automatic stay precluded the

imposition of such a lien in this case.

ical )

45a

PBGC asserts that I.R.C. §412(n) does not require

perfection of a lien before the amount thereof is entitled

to tax priority. According to PBGC, Congress intended

to give first priority not to perfected liens (which are

entitled to priority under the Bankruptcy Code), but

rather to the amount of liens that could arise. PBGC

further argues that the lien at issue was imposed by

operation of statute when the pension plan was estab-

lished and therefore existed pre-petition. The Reorganized

Debtors and the United Steelworkers, on the other hand,

argue that the bankruptcy court followed the clear lan-

guage of I.R.C. § 412(n), that priority is given to the

“amount with respect to which a lien is imposed,” when

it held that the imposition of the lien was blocked by the

automatic stay.

ERISA and the I.R.C. provide for a lien that arises on

the 60th day after an employer falls more than $1 million

behind in making its minimum funding contributions.

IL.R.C. §412(n); 29 U.S.C. § 1082(f) (Supp. 1994).

ERISA and the I.R.C. further provide that the “amount

with respect to which a lien is imposed . . . shall be

treated as taxes due and owing the United States.” ERISA

§ 302(f), 29 U.S.C. § 1082(f)(4)(C) (Supp. 1994);

LR.C. §412(n)(4)(C), 29 U.S.C. § 412(n)(4)(C)

(1985). The Bankruptcy Code gives first priority to cer-

tain taxes as administrative expenses under 11 U.S.C.

§ 503(b)(1)(B), and seventh priority to certain other

taxes pursuant to 11 U.S.C. § 507(a)(7).

The priority provided by these statutes, as the bank-

ruptcy court held, never arose in this case due to the

operation of the automatic stay. The automatic stay pre-

cludes “any act to create, perfect, or enforce any lien

against property of the estate” and “any act to create,

perfect, or enforce against property of the debtor any lien

to the extent that such lien secures a claim that arose

before the commencement of the case under this title.” 11

U.S.C. § 362(a) (4), (5) (1993). The bankruptcy court

46a

followed the clear language of ILR.C. § 412(n) and 29

U.S.C. § 1082(f) when ruling that liens arise 60 days

after the day that the unpaid contributions amount to $1

million and when determining that tax priority is given

only to liens, not to the amount of claims that never be-

come liens.

Il. Timing of Minimum Funding Contributions

PBGC argues that the bankruptcy court erred in hold-

ing that PBGC’s claims for minimum funding contribu-

tions arose pre-petition rather than when the quarterly pay-

ments became due. The bankruptcy court held that the

transaction giving rise to the Debtors’ liability for con-

tributions was the pre-petition labor of the Debtors’ em-

ployees. PBGC argues that the unpaid contributions that

came due post-petition should be given first priority as

post-petition taxes, and that the contributions Debtors

failed to make pre-petition are entitled to seventh priority

as pre-petition taxes.

The bankruptcy court correctly analyzed the Reorga-

nized Debtors’ liability by examining the time at which

the consideration for that liability occurred. In this case,

the acts that gave rise to the Debtors’ liability to pay

mandatory contributions to PBGC is the performance of

labor by the Debtors’ employees. LTV Corp. v. Pension

Benefit Guaranty Corp. (In re Chateaugay Corp.), 115

B.R. 760, 772-78 (Bankr. S.D.N.Y. 1990). Because the

performance of labor occurred pre-petition, the liability

to PBGC arose pre-petition.

Ill. Administrative Expense Priority Status for Minimum

Funding Contribution Claims

PBGC asserts, as an alternative to the argument that its

claims for minimum funding contributions are entitled to

tax priority, that $37,680,574 of those unpaid contribu-

tions are entitled to administrative expense priority. The

Reorganized Debtors and the United Steelworkers argue

47a

that the bankruptcy court correctly determined that those

claims were not administrative because minimum funding

contributions did not benefit the Reorganized Debtors.

On appeal, PBGC argues that contributions to pension

plans qualify as administrative expenses because they are

a “cost of doing business” during a reorganization. PBGC

relies on Section 507(a)(1) of the Bankruptcy Code,

which defines administrative expenses as “including wages,

salaries, or commissions for services rendered after the

commencement of the case.” 11 U.S.C. § 507(a)(1)

(1993). According to PBGC, the list in Section 507(a)(1)

is not exclusive due to the word “including.” PBGC also

contends that the costs of compliance with regulatory

schemes qualify as administrative expenses.

The Tenth Circuit has established the following two-

part test for determining which claims qualify as adminis-

trative expenses:

an expense is administrative only if it arises out of

a transaction between the creditor and the bankrupt’s

trustee or debtor in possession and only to the extent

that the consideration supporting the claimant's right

to payment was both supplied to and beneficial to the

debtor-in-possession in the operation of the business.

In re Amarex, Inc., 853 F.2d 1526, 1530 (10th Cir.

1988). This is the test the bankruptcy court applied

below. The bankruptcy court correctly ruled on the basis

of this test that the claims arising from the Reorganized

Debtors’ failure to pay pre-petition mandatory contribu-

tions are not entitled to priority as administrative ex-

penses. Although the payment of minimum funding con-

tributions may create some good will among employees,

making those payments is not “beneficial to the debtor-in-

possession in the operation of the business” as that lan-

guage has been interpreted in the relevant case law. Fur-

thermore, the payments arise out of a transaction between

48a

the employees and the Reorganized Debtors rather than

a “transaction between the creditor and the bankrupt’s

trustee or debtor in possession.”

IV. Post-Petition Interest on Minimum Funding Con-

tribution Claims

PBGC argued below that, because its claim for unpaid

mandatory contributions is entitled to tax priority, PBGC

is also entitled to interest on the amount of that claim.

The bankruptcy court denied post-petition interest on those

claims.

On appeal, PBGC asserts that it is “well settled” that

interest on post-petition taxes is entitled to administrative

priority. The Reorganized Debtors and the United Steel-

workers argue that PBGC is not entitled to interest on its

mandatory contributions claim because (1) those claims

do not qualify for tax priority; (2) administrative expense

claims are not entitled to interest; and (3) unsecured cred-

itors are not entitled to interest unless the debtors are

solvent.

This issue is related to the question whether PBGC’s

claims for minimum funding contributions are entitled to

tax or administrative expense pricrity. Consistent with this

Court’s denial of PBGC’s claim for tax or administrative

priority, this Court also upholds the bankruptcy court’s

denial of interest on those claims.

V. Tax Priority Claim for Unfunded Benefit Liabilities

PBGC contends that the bankruptcy court erroneously

denied tax-priority status to its $3 million claim for un-

funded benefit liabilities. The tax-priority status of that

claim, according to PBGC, derives from a statutory lien

that attaches to all property rights held by the Debtors.

The amount of that lien cannot exceed one-third of the

Debtors’ collective net worth. PBGC asserts that the

unfunded benefit liabilities in this case amount to $222,-

866,000 Due to the statutory limitations, PBGC seeks a

49a

priority claim of only $3 million, or about one-third of

the Debtors’ estimated collective net worth of about $10

million.?

The bankruptcy court held that PBGC’s $3 million

claim is not entitled to tax priority because the termina-

tion of the Plan occurred post-petition, and the automatic

stay precluded the imposition of the lien provided for by

ERISA section 4068(c)(2), 29 U.S.C. § 1368(c)(2).

According to PBGC, the bankruptcy court erroneously

failed to follow the proposition that “the portion of the

liability . . . to which the lien pertained was itself a tax,

entitled to priority in bankruptcy.” Tax priority is not

preconditioned on the attachment or perfection of a lien,

according to PBGC. PBGC asserts that Congress’ capping

of the lien at 30 percent of the Debtors’ net worth shows

that Congress took into consideration the burden that

creating a priority in favor of PBGC would have on other

creditors.

The bankruptcy court was correct, as the Reorganized

Debtors and the United Steelworkers urge, in holding that

tax priority arises only as to those unfunded benefit liabili-

ties to which a lien is imposed, and that the automatic

stay precluded the creation of the statutory lien. Like

claims for minimum funding contributions, claims for

unfunded benefit liabilities are entitled to tax priority only

to the extent that a lien for the amount of those claims

arises. As to PBGC’s congressional intent argument, the

better reasoned position is that Congress exhibited its in-

tent to deny tax-priority status to those liabilities to which

no liens are imposed by specifically providing tax-priority

status to unfunded benefit liabilities to which liens are

imposed.

1 PBGC concedes that is [sic] has only an unsecured claim for the

balance of the unfunded benefit liabilities.

50a

ISSUES ON CROSS-APPEAL

I. Discount Rate

On cross-appeal, the Reorganized Debtors and the

United Steelworkers contest the bankruptcy court’s defer-

ence to PBGC’s determination of the method and dis-

count rate to be applied to the unfunded benefit liabilities

claim. The cross-appellees claim that the bankruptcy

court not only is statutorily required to determine the

applicable discount rate in this instance, but also had no

need to defer to the agency’s expertise because the bank-

ruptcy court often makes such determinations. Further-

more, the cross-appellees maintain that allowing PBGC to

self-select an artificially low discount rate unjustifiably

inflates PBGC’s recovery to the detriment of other un-

secured creditors. The Reorganized Debtors and the

United Steelworkers assert that the bankruptcy court should

not have based its decision on ERISA’s policy goals, but

should have employed fundamental bankruptcy principles

and adopted a prudent investor method.

PBGC maintains that the unfunded benefit liabilities

claim should be calculated according to PBGC’s valua-

tion as authorized by ERISA in 29 U.S.C. § 1301(a)(18).

PBGC asserts that, because Congress did not expressly

define the actuarial present value of the guaranteed bene-

fits, Congress defers to agency interpretation unless that

interpretation is arbitrary and capricious based on the

Supreme Court’s ruling in Chevron, U.S.A., Inc. v. Natu-

ral Resources Defense Council, 467 U.S. 837 (1984).

PBGC proposed a method of valuation which replicates

the market price for insurance company close-out annui-

ties for terminated pension plans, and the bankruptcy

court accorded PBGC’s determination of the method and

discount rate “due deference” and “substantial weight” and

found that no unfair or unreasonable advantage existed in

favor of PBGC.

Neither bankruptcy law nor ERISA expressly states

whether the bankruptcy court or PBGC has ultimate

Sla

responsibility to determine the actuarial present value of

guaranteed benefits in the reorganization context. Never-

theless, principles of statutory interpretation place that

responsibility on the bankruptcy court. It is undisputed

that both ERISA and the Bankruptcy Code authorize

PBGC and the bankruptcy court to determine the dis-

count rate related to pension termination liability. 29

U.S.C. § 1301(a)(18) (Supp. 1994); 11 U.S.C. § 502(b)

(1993); see also In re Chateaugay Corp., 115 B.R. 760,

766 (Bankr. S.D.N.Y. 1990), vacated by consent of the

parties, 17 Employee Benefits Cas. (BNA) 1102 (S.D.N.Y.

1993). PBGC asserts that because Congress has not

spoken to the precise issue, the court must give defer-

ence to the agency’s interpretation based on agency ex-

pertise. However, the bankruptcy court also has vast

experience in determining the present value of future pay-

ments, if_not the precise valuation issue presented here.

See, e.g., In re Hardzog, 901 F.2d 858 (10th Cir. 1990)

(determining present value of future cash flows in Bank-

ruptcy Chapter 12 context); Jn re Camino Real Land-

scape Maintenance Contractors, Inc., 818 F.2d 1503 (9th

Cir. 1987) (fixing present value of federal tax claims in

Chapter 11 reorganization).

It is well established that where ERISA conflicts with

another provision of federal law, ERISA must be sub-

ordinated. ERISA explicitly states that “[njothing in this

subchapter shall be construed to alter, amend, modify,

invalidate, impair or supersede any law of the United

States . . . or any rule or regulation issued under any

such law.” 29 U.S.C. § 1144(d) (1985). In the instant

case, ERISA and the Bankruptcy Code conflict. Both

PBGC and the bankruptcy court are authorized to make

valuations of the claims. However, the bankruptcy court

has an additional mandate to advance the principle of

equality of treatment between similarly situated creditors.

11 U.S.C. § 1123(a)(4) (1993). Thus, ERISA must be

subordinated to the Bankruptcy Code, and the present

value calculations relating to pension termination liability

— ee

52a

must be determined according to bankruptcy law. The

bankruptcy court applied the wrong standard of review in

giving deference to PBGC’s interpretation.

The bankruptcy court concluded that the method pro-

posed by PBGC is appropriate in this instance only after

holding an evidentiary hearing at which expert witnesses

testified as to various methods for calculating discount

rates, as well as acknowledging its obligation to deter-

mine the present value of PBGC’s claims in accordance

with the overriding policy goals embodied in the Bank-

ruptcy Code. Nevertheless, the bankruptcy court’s appli-

cation of an improper standard of review may have pre-

vented the bankruptcy court from fulfilling its statutory

obligation to independently ascertain an appropriate dis-

count rate. The bankruptcy court’s legal conclusion that

deference was due PBGC’s interpretation is reversed and

remanded to the bankruptcy court to make an independent

evaluation.

II. Duplication of Claims

The Reorganized Debtors and the United Steelworkers

challenge the bankruptcy court’s order giving PBGC credit

for the probable value, rather than the face value, of the

minimum contribution claims. However, parties may not

invoke the judicial power of the court unless the challenge

raises an actual case or controversy. Memphis Light, Gas

& Water Division v. Craft, 436 U.S. 1, 98 S.Ct. 1554,

1559, 56 L.Ed.2d 30 (1978). If a claim is “so insub-

stantial or so clearly foreclosed by prior decisions,” then

the claim may not proceed. 98 S.Ct. at 1560. Because

the bankruptcy court entirely disallowed the pre-petition

portion of PBGC’s minimum contribution claim, the under-

lying economic result is the same as if the cross-appellees

prevail upon the duplication issue. Therefore, the dupli-

cation issue is foreclosed by the bankruptcy court’s prior

order and is moot.

53a

III. Joint and Several Liability

The Reorganized Debtors contend that the bankruptcy

court erred by applying joint and several liability. Ac-

cording to the Reorganized Debtors, requiring each of the

Debtors to bear full responsibility for liability translates

into a tenfold recovery for PBGC, while other unsecured

creditors realize a single recovery. The Reorganized Debt-

ors contend this violates bankruptcy principles of equal

distribution among creditors and allows PBGC to unfairly

inflate its claims. Furthermore, the Reorganized Debtors

claim that joint and several liability is incongruous with

ERISA’s principles of controlled group liability, which

treats commonly controlled businesses as one employer for

liability purposes. The Reorganized Debtors also argue

that the Congress expressly provides that ERISA is sub-

ordinate to bankruptcy law under 29 U.S.C. § 1144(d).

PBGC maintains that the Debtors are properly obli-

gated for joint and several liability under ERISA, which

governs the validity and amount of these claims. PBGC

asserts that the plain language of ERISA clearly imposes

joint and several liability. PBGC denies that it is similarly

situated to other creditors, conversely, it has a statutory

claim against each of the ten debtors, not just one.

“As in any case of statutory interpretation, we begin

with the plain language of the law.” Federal Deposit In-

surance Corp. v. Canfield, 957 F.2d 786, 787 (10th Cir.

1992) (citing United States v. Morgan, 922 F.2d 1495,

1496 (10th Cir.), cert. denied, US. , 111 S.Ct.

2803, 115 L.Ed.2d 976 (1921)). Under ERISA, Con.

gress expressly provides:

In any case in which a single-employer plan is termi-

nated in a distress termination under section 1341(c)

of this title or a termination otherwise instituted by

the corporation under section 1342 of this title, any

person who is, on the termination date, a contributing

sponsor of the plan or a member of such a contribut-

ing sponsor’s controlled group shall incur liability

54a

under this section. The liability under this section of

all such persons shall be joint and several.

29 U.S.C. § 1362(a) (Supp. 1994); accord I.R.C. § 412

(c)(11)(B) (1988 & Supp. 1994); 29 U.S.C. § 1082

(c)(11)(B) (Supp. 1994). Next, “‘[a]bsent a clearly ex-

pressed legislative intention to the contrary, that language

must ordinarily be regarded as conclusive.’” Federal De-

posit Insurance Corp., 957 F.2d at 787 citing Kaiser

Aluminum & Chem. Corp. v. Bonjorno, 494 U.S. 827,

110 S.Ct. 1570, 1575, 108 L.Ed.2d 842 (1990 (cita-

tion omitted) ).

Here, Congress has clearly provided for the imposition

of joint and several liability against the Reorganized Debt-

ors, and it has not expressed any explicit, contrary legisla-

tive intent. Furthermore, PBGC’s position is consistent

with the case law. See Tavery v. United States, 897 F.2d

1032 (10th Cir. 1990) (regarding claims against joint

obligors as distinct and separate, including application to

joint income tax returns). The bankruptcy court aptly

stated that ERISA’s express mandate of joint and several

liability “may well impact adversely on other creditors,

but the principles of equal distribution to creditors are

not so offended as to override the direct intent of Congress

under ERISA.” (Bankr. Ct.’s Mem. Decision & Order,

dated 10/2/92 at 9.) This Court affirms the bankruptcy

court’s order allowing joint and several liability.

CONCLUSION

On PBGC’s appeal, all aspects of the bankruptcy court’s

decisions are AFFIRMED except that portion concerning

the duplication of claims, which is moot. As to the cross-

appeal, all decisions of the bankruptcy court are AF-

FIRMED with the exception of the bankruptcy court’s

determination of the appropriate discount rate. To the

extent the bankruptcy court deferred to PBGC in arriving

at the appropriate discount rate, such deference was im-

proper. As to that issue only, the case is REMANDED

55a

for an independent discount rate determination without

any deference to the position of PBGC.

Dated this 17th day of November, 1994.

/s/ Dee Benson

DEE BENSON

United States District Judge

56a

[Filed May 21, 1993]

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF UTAH

CENTRAL DIVISION

Jointly Administered

Under Case No. 90B-6721

Chapter 11

IN RE: CF&I FABRICATORS OF UTAH, INC., ef al.,

Debtors.

(Case No. 90B-6721 )

(CF&I Fabricators of Utah, Inc.)

(Case No. 90B-6722)

(Colorado & Utah Land Company)

(Case No. 90B-6723 )

(Kansas Metals Company)

(Case No. 90B-6724)

(Albuquerque Metals Company)

(Case No. 90B-6725)

(Pueblo Metals Company)

(Case No. 90B-6726)

(Denver Metals Company)

(Case No. 90B-6727)

(Pueblo Railroad Service Company)

(Case No. 90B-6728 )

(CF&I Fabricators of Colorado, Inc.)

(Case No. 90B-6729)

(CF&I Steel Corporation)

(Case No. 90B-6730)

(The Colorado and Wyoming Railway Company)

57a

ORDER ON MOTION OF PENSION BENEFIT

GUARANTY CORPORATION,

DATED 1/11/93, FOR RECONSIDERATION

AND ALLOWANCE OF RECALCULATED CLAIMS

The Motion of Pension Benefit Guaranty Corporation

(“PBGC”), Dated 1/11/93, for Reconsideration and

Allowance of Recalculated Claims (the “Motion for Re-

consideration”) came on for hearing on February 25,

1993 at 10:00 a.m. Appearing on behalf of PBGC were

Robert D. Merrill, John R. Labovitz and Frank H. Mc-

Culloch II. Appearing on behalf of the Debtors were

Edward A. Scallet and Lon A. Jenkins. Appearing on

behalf of the Unsecured Creditors’ Committee was Steven

T. Waterman. The Court’s findings were stated on the

record and are incorporated herein by reference. Based

upon the pleadings filed, the prior Orders of this Court

dated November 9, 1992 and December 31, 1992, and

the argument of counsel and the evidence presented at the

hearing with respect to the calculation of PBGC’s Un-

funded Benefit Liability Claim,

IT IS HEREBY ORDERED that Motion for Recon-

sideration is denied; and

IT IS FURTHER ORDERED that PBGC’s recalcu-

lated Unfunded Benefit Liability Claim is allowed as a

general unsecured claim in the amount of $220,953,000

and;

IT IS FURTHER ORDERED that the prior Orders of

this Court dated November 9, 1992 and December 31,

1992 are incorporated into this final Order by reference.

DATED this 20 day of May, 1993.

By THE CourT:

/s/ Judith A. Bolden

HONORABLE JupDITH A. BOULDEN

United States Bankruptcy Judge

58a

Approved as to form:

/s/ Lon A. Jenkins

EDWARD A. SCALLET

Lon A. JENKINS

Counsel for the Debtors

/s/ Robert D. Merrill

ROBERT D. MERRILL

Counsel for the Pension

Guaranty Corp.

/s/ Steven T. Waterman

STEVEN T. WATERMAN

Counsel for the Unsecured

Creditors’ Committee

59a

[Filed Dec. 31, 1992]

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF UTAH

CENTRAL DIVISION

Jointly Administered Under [sic]

Under Case No. 90B-6721

[Chapter 11]

IN RE: CF&I FABRICATORS OF UTAH, INC., et al.,

Debtor.

(Case No. 90B-6721 )

(CF&I Fabricators of Utah, Inc.)

(Case No. 90B-6722)

(Colorado & Utah Land Co.)

(Case No. 90B-6723)

(Kansas Metals Company)

(Case No. 90B-6724)

(Albuquerque Metals Company)

(Case No. 90B-6725 )

(Pueblo Metals Company)

(Case No. 90B-6726)

(Denver Metals Company)

(Case No. 90B-6727)

(Pueblo Railroad Service Company)

(Case No. 90B-6728)

(CF&I Fabricators of Colorado, Inc.)

(Case No. 90B-6729)

(CF&I Steel Corporation)

(Case No. 90B-6730)

(The Colorado and Wyoming Railway Company)

60a

MEMORANDUM DECISION AND ORDER FROM

EVIDENTIARL HEARING RELATING TO

DEBTORS’ OBJECTIONS, DATED 10/02/92,

TO TWENTY AMENDED PROOFS OF CLAIM

FILED BY PENSION BENEFIT

GUARANTY CORPORATION

On November 9, 1992, this court ruled on certain legal

issues related to the objections raised by these debtors-in-

possession (Debtors’)* and the Official Unsecured Credi-

tors Committee (Committee) to twenty amended proofs

of claim filed by the Pension Benefit Guaranty Corpora-

tion (the PBGC)?. The court allowed the PBGC’s claims

against these Debtors on a joint and several basis, but

ruled that certain portions of the PBGC’s claims were not

entitled to priority status as taxes due and owing to the

United States. The court denied the PBGC’s claims pre-

petition priority or post-petition administrative status ex-

cept to the extent such claims represented “normal pen-

sion costs.” The court reserved for an evidentiary hearing

the allowed amount of the claims, whether there existed

any equitable grounds for the court to modify the present

value of a portion of the PBGC’s claims, and the extent

to which the PBGC’s claims were duplicative. If the court

found that grounds existed for modification of the PBGC’s

claims, the parties were to present evidence regarding the

appropriate interest rate or other applicable adjustments.

An evidentiary hearing was held on the remaining

factual issues on November 10, 12 and 30, 1992. The

court has weighed the evidence adduced at the hearing,

considered the arguments of counsel, and has made an

independent review of applicable case law. Now being

fully informed, the court determines that the PBGC has

1 The Debtors in these jointly administered Chapter 11 cases are

related steel production companies.

2 The PBGC is a wholly-owned United States government corpora-

tion required to guarantee payment of non-forfeitable or vested

benefits under terminated pension plans.

SOS eee ae ike Fate ee HRS

6la

met its burden of proving the substance of portions of its

claims according to applicable non-bankruptcy law, and

that the claims are allowed in part, subject to the modifi-

cations set forth below.

JURISDICTION

This court has jurisdiction over this proceeding pursu-

ant to 28 U.S.C. § 1334. This is a core proceeding under

28 U.S.C. § 157(b)(2)(A), (B) and (O) as a matter

involving the administration of the estate, the allowance

and priority of claims and the adjustment of the debtor-

creditor relationship. The matter is before the court under

Rule 404(a) of the United States District Court for the

District of Utah. Rule 404(a) automatically refers bank-

ruptcy cases and proceedings to this court for hearing

and determination.

BURDEN OF PROOF

The PBGC’s claims are allowed pursuant to 11 U.S.C.

§ 502(a) unless a party in interest objects. Upon objec-

tion, the court shall determine the amount of the claim

pursuant to 11 U.S.C. § 502(b). The Debtors have pro-

duced evidence indicating that the PBGC may have calcu-

lated its claims in amounts that are excessive. The Debt-

ors’ evidence is equal in probative force to that underlying

the PBGC’s claims, thus shifting the burden to the PBGC

to prove its claims generally. Fullmer v. United States

(In re Fullmer), 962 F.2d 1463, 1466 (10th Cir. 1992),

citing In re Wells, 51 B.R. 563, 566 (D. Colo. 1985).

Substantive federal law determines the validity of the

PBGC’s claims. Grogan v. Garner, 498 US. 279, 111

S.Ct. 654, 657-8 (1991). The PBGC must prove its

claims by a preponderance of the evidence. Wells, 51

B.R. at 567.

HISTORY OF THE CASE 3

At the time of filing, the Debtors were sponsors and

CF&I Steel Corporation ( CF&I) was the administrator of

3 The facts of the case are more fully set forth in the prior opin-

ion of the court dated November 9, 1992.

62a

two pension plans. CF&I promised to provide fixed pen-

sion benefits under these plans that would be calculated

with reference to each employee’s pay and years of service.

CF&I was obligated to provide annual plan funding con-

tributions based on the actuarial valuation of the benefits

earned by its employees. CF&I failed to make the mini-

mum funding payment that became due on one of the

plans (Master Plan) on September 15, 1990. On Novem-

ber 7, 1990, the Debtors filed petitions for reorganization

under chapter 11 of the United States Bankruptcy Code.

On March 19, 1992, the PBGC instituted proceedings

to terminate the Master Plan. CF&I consented to the

termination on behalf of the Master Plan, and entered

into a trusteeship agreement with the PBGC effective

March 19, 1992. Pursuant to this agreement, the PBGC

became the successor trustee of the Master Plan. The

PBGC also became liable for guaranteed benefits to plan

participants.

The PBGC filed two proofs of claim against each of

the Debtors in connection with the Master Plan. These

claims fall into two general categories: (1) claims for due

and unpaid minimum funding contributions allegedly due

and owing the Master Plan pursuant to 29 U.S.C. § 1082

(ERISA § 302), and 26 U.S.C. § 412 (LR.C. § 412)

(the Minimum Contribution Claims); and (2) claims on

behalf of the PBGC for unfunded benefit labilities [sic]

under the Master Plan pursuant to 29 U.S.C. § 1362 (the

Unfunded Benefit Claims) designed to reimburse the

PBGC for at least a portion of the amounts that it must

pay to pensioners (collectively the Claims).

On July 31, 1992, after termination of the Master

Plan, the PBGC amended its proofs of claim. The

amendments increased the amount of each of the ten

Minimum Contribution Claims to an estimated amount

of $64.874.511, and the amount of each of the ten

Unfunded Benefit Claims to an estimated amount of

63a

$263,200,000. At closing argument, the PBGC asserted

that the evidence supported allowance of the followin

claims: 1) pre-petition normal pension costs of $429,232

pursuant to 11 U.S.C. § 507(a)(4); 2) post-petition nor-

mal pension cost for the period from November 7, 1990

to March 19, 1992, of $1,565,198 pursuant to 11 U.S.C.

§ 507(a)(1); 3) general unsecured claims for the bal-

ance of the unpaid Minimum Contribution Claims of

$69,228,372; and 4) general unsecured claims for the

Unfunded Benefit Claims of $212,286,000. The $212.-

286,000 figure represented the present value of Master

Plan liabilities on the date of plan termination, less the

value of plan assets on that same date, and less the value

of the unpaid Minimum Contributions Claims to be paid

through the Debtors’ proposed plan.

MINIMUM CONTRIBUTION CLAIMS

i. Total Minimum Contribution Claims.

The unpaid Minimum Contribution Claims were com-

puted as of the March 19, 1992, termination date of the

Master Plan. They reflect the differenec between the

minimum funding requirements that the enrolled actuary

for the plan certified CF&I must contribute to the Master

Plan, and the amounts actually contributed. The PBGC,

through its independent contract actuary, relied upon the

work and assumptions of the enrolled actuary for the

Master Plan contained in Schedules B of the 1988, 1989,

and 1990 actuarial reports to make the calculations for

the Claims. The PBGC also received from the Master

Plan’s enrolled actuary, and relied upon, cost pages from

a draft of the 1992 actuarial valuation report and a 199]

draft actuarial report. Based upon that updated infor-

mation the PBGC recalculated the total due and unpaid

Miniumum Contribution Claims at $71,222.802. Although

the updated 1991 and 1992 information was in draft

form, there was no contradictory evidence to indicate that

the data was erroneous or unreliable. To the extent

64a

that the data supplied by the draft report was the basis

for calculation of portions of the Minimum Contribution

Claims, it is credible evidence of the amount of the claims

unless refuted or impeached.

2. Calculation of normal pension costs for purposes of

determining 11 U.S.C. § 507(a)(4) priority claim.

The court previously determined that a portion of the

Minimum Contribution Claims representing normal pen-

sion costs * would be allowed 11 U.S.C. section 507(a)(4)

priority status. The parties stipulated that the normal

pension costs, for the 180 days prior to filing bankruptcy,

were $429,232. The parties disagree regarding the method

of calculating what portion of the normal pension costs

should be allowed priority status under 11 U.S.C.

§ 507(a) (4).

The first component of the equation provided by 11

U.S.C. § 507(a)(4) is the calculation of the maximum

amount of allowed unsecured claims for contributions to

employee benefit plans; in this case the normal pension

costs. This maximum amount is then reduced by the

amount of the second component, the actual distribution

under 11 U.S.C. § 507(a)(3). The Debtors’ method of

calculation based on pension plan contributions attributa-

ble to each employee on an individual basis reduces the

PBGC’s entire pre-petition normal pension costs claims

by $9,457.03. This amount equals the total amount of

pension plan contributions attributable to individual em-

ployees in excess of a $2,000 limit for each employee.

The PBGC argues that the statute should be interpreted

to provide a maximum allowable contribution claim calcu-

lated by multiplying 1856 (number of employees)* by

$2,000. That amount is $3,712,000. The PBGC argues

4 Normal pension cost is an actuarial term that consists of the

present value of the benefits paid in the future allocated in today’s

dollars to a particular year under the employers funding method.

65a

that because the pre-petition normal pension costs are

$429,232, an amount much smaller than $3,712,000, the

entire $429,232 claim for normal pension costs is well

within the maximum amount allowed by 11 U.S.C.

§ 507(a) (4).

The court agrees with the PBGC’s interpretation. The

wording of the statute is quite specific and should be

afforded its plain narrow meaning. In re Pittston Steve-

doring Corp., 40 B.R. 424, 428 (Bankr. $.D.N.Y. 1984).

The statute provides an aggregate figure for the maximum

amount of contribution claims arising from services per-

formed within 180 days before the petition date for each

plan. The maximum allowable claim is not based on an

employee specific calculation.

The second component of the equation provided by

11 U.S.C. § 507(a)(4) is determined by subtracting the

aggregate distribution to employees under 11 U.S.C.

§ 507(a)(3) from the normal pension costs. The amount

of allowed unsecured claims for contributions to employee

benefit plans entitled to administrative priority is tied

directly to the 11 U.S.C. §507(a)(3) wage priority

claims. In re Unimet Corp., 100 B.R. 881, 886 (Bankr.

N.D. Ohio 1988).

The Debtors paid current wages due and owing to their

employees by issuing cashier’s check on November 6,

1990, the day prior to filing, in order to avert a strike

or other labor disturbance. If the Debtors had not paid

the wages current on November 6, 1990, the wage claims

up to the amount of $2,000 per employee would have

had priority wage status pursuant to 11 U.S.C. § 507(a)(3).

5 Debtors’ Exhibit 1 provded the number of employees included

in the calculation. The Debtors prepared an exhaustive accounting

of the accrued wage claims paid pre-petition, allocation of normal

pension costs and amount of 11 U.S.C. § 507(a)(3) priority claim

available to each employee.

66a

The effect of the payment of all wage claims prior to filing

was to eliminate any offset under 11 U.S.C. § 507(a)(3)

against the maximum allowable pension plan contributions

payable under 11 U.S.C. § 507(a)(4). As of the date

of filing, there were no unsecured and unpaid 11 U.S.C.

§ 507(a)(3) priority wage claims against the Debtors’

estate.

The Debtors argue that they could bring preference

actions against their employees to recover the wages paid

pre-petition and then seek court approval for priority pay-

ment of the wage claims. By extension, the same argu-

ment could be applied to recover all wages to the extent

of $2,000 paid to employees within the 90 day period prior

to the petition date. There is no logical reason this argu-

ment should be limited only to the amounts paid by the

Debtors on November 6, 1990. Alternatively, the Debtors

argue that the cashier’s checks would not have been pre-

sented for payment until November 7, 1990, at the earliest,

and extending the holding of Barnhill v. Johnson (In re

Antweil), 112 S.Ct. 1386 (1992), the cashier’s checks

represented post-petition 11 U.S.C. § 507(a)(3)_ pay-

ments. In Barnhill, the Supreme Court held that for pur-

poses of establishing a voidable preference under 11 U.S.C.

§ 547(b), the transfer of a check occurs when the check

is honored by the drawee bank.

The evidence indicated that the cashier’s checks were

issued and mailed on November 6, 1990, but there was no

credible evidence as to the date of delivery. A cashier’s

check, unlike the check at issue in Barnhill, is the legal

equivalent of currency. In re Kimball, 16 B.R. 201, 203

(Bankr. S.D. Fla. 1981). A certified check constitutes

an immediate assignment of funds, and, therefore. is pay-

ment of the underlying debt. Jn re Midwest Boiler &

Erectors, Inc., 54 B.R. 793, 795 (Bankr. E.D. Mo. 1985).

Because there is no significant difference between c2shier’s

67a

checks and currency, payment occurs upon delivery. Kim-

ball, 16 B.R. at 203.

)

: The court will not accept the Debtors’ rationalization

) because it flies in the face of the facts, defeats the clear

language of the statute and advances alternatively incon-

sistent positions. Payment of unpaid wage claims by

: cashier’s check one day prior to the petition date either

: eliminated all priority wage claims under 11 U.S.C.

§ 507(a)(3) or, as a logical extension of the Debtor’s

: alternative argument, it represented an unauthorized post-

petition distribution of estate assets to pre-petition cred-

) itors. The evidence does not adequately establish a post-

petition delivery date for the cashier’s checks. Further-

) more, the testimony does establish that the Debtors’ made

a calculated business decision to issue wage payments prior

: to the petition date.

Because no allowed unsecured wage claims existed on

the date of filing, there could be no distribution under

11 U.S.C. § 507(a)(3), and the Claims cannot be re-

duced by the $85,019.28 pre-petition distribution to em-

ployees. Based on the testimony and evidence before the

court, the PBGC’s total priority claim under 11 U.S.C.

§ 507(a) (4) is $429,232.

3. Normal pension costs as post-petition administrative

claims pursuant to 11 U.S.C. § 507(a) (1).

Evidence indicates that the normal pension costs that

accrued post-petition are as follows: for 1990 a pro-rated

figure for the post-filing period of $119,653 °: for 1991 a

total of $1,150,902; and for 1992 the amount of

$294,643 up to the date of plan termination. The post-

petition normal pension costs total $1,565,198. The

Debtors argued that these figures are based upon draft

ero

6 $808,767 representing the normal costs for the entire vear of

1990, divided by .147945 representing 54/365, the number of days

left in the year after the date of filing.

a nr ae

Saas

68a

actuarial reports that were not signed by the enrolled

actuary for the plan. They failed, however, to present

evidence that the figures were incorrect or to present credi-

ble evidence that the PBGC’s calculations of the post-

petition normal pension costs were erroneous. The evi-

dence presented by the PBGC preponderates. Based on

the testimony and evidence before the court, the PBGC’s

total administrative claim under 11 U.S.C. §§ 503(b) (1)

(A) and 507(a)(1) is $1,565,198.

4. Interest on the Unsecured Portion of the Minimum

Contribution Claims.

The evidence indicated that $69,228,372 of the Mini-

mum Contribution Claims not attributable to normal pen-

sion costs was calculated according to 26 U.S.C. § 412

(I.R.C. § 412) using an interest factor to both discount

the amount and to “get us to an appropriate place in

time.” (Dezube, transcript November 10, 1992, p. 41.)

To the extent an interest factor is used to discount the

claim to present value, it reflects the appropriate methodol-

ogy provided by substantive law to calculate the PBGC’s

claim. However, the evidence indicates that interest was

also used to bring the claim forward in time and that the

claim includes interest that allegedly accrued as a result

of the Debtors’ failure to make contributions to the Master

Plan after the filing date.

The PBGC’s exhibit 8 (Exhibit) purported to itemize

the components of its $71,222,802 Minium Contributions

Claims.?. The Exhibit summarized the dates and amount

of each contribution due to the Master Plan, as well as

a summary of contributions actually made by the Debtors

from the beginning of 1989 and forward through 1993.

The Exhibit then purported to total the amount of the

Minimum Contribution Claims. The Exhibit includes

7 Amounts due and credits reflected in the Exhibit do not total

the Minimum Contribution Claim of $71,222,802 illustrated by the

Exhibit.

BS yg nH

69a

amounts after the date of the filing of the chapter 11

petitions, as well as amounts after termination of the

Master Plan. It also includes contributions due and

credits for contributions made through 1993.

The testimony regarding the calculation described by

the Exhibit indicated that over $5,000,000 of the

$71,222,802 claim itemized in the Exhibit included in-

terest attributable to contributions due after termination

of the plan. It is impossible to determine from the evi-

dence what specific portions of the Minimum Contribution

Claims are attributable to post-petition interest. The

PBGC argues that the Internal Revenue Code requires it

to include interest in the calculation of its Minimum Con-

tribution Claims. Although the substantive law may con-

trol calculation of the PBGC’s claim, it does not allow

accrual of interest in derogation of the rights of other

unsecured creditors. Post-petition interest on the pre-

petition portion of the Minimum Contribution Claims will

not be allowed. United States v. Fullmer (In re F ullmer),

962 F.2d 1463, 1467 (10th Cir. 1992) (unmatured in-

terest is disallowed against estate pursuant to 11 U.S.C.

§ 502(b)(2)); see also, In re Kentucky Lumber Co., 860

F.2d 674, 676-79 (6th Cir. 1988); In re Burgess Whole-

sale Mfg. Opticians, Inc., 721 F.2d 1146, 1147 n.1 (7th

Cir. 1983).

The Exhibit also appears to include amounts for mini-

mum funding contributions that came due after the PBGC

terminated the Master Plan. All of the testimony and

argument referred to the Debtors’ liability to the PBGC

and the Master Plan as of the March 19, 1992, termina-

tion date. The PBGC offered no explanation nor evidence

why post-termination funding requirements were included

in the calculation contained in the Exhibit. The PBGC’s

claims should have been calculated as of the date of plan

termination after which the Debtors were no longer liable

to make contributions to the Master Plan. The PBGC’s

apparent inclusion of post-termination minimum funding

70a

payments in the Exhibit is inexplicable and without evi-

dentiary support.

Neither the testimony, the Exhibit, nor reference to any

other specific exhibit, clarified the source of the figures

set forth on the Exhibit or precisely how the $69,228,372

was calculated. The evidence only indicated that the

figures contained post-petition interest, post-termination

charges, and charges attributable to amounts due in the

future. The PBGC argues that it is not possible, nor is it

required, to allocate its Claims. To the contrary, the

burden has shifted to the PBGC to prove the validity of

all aspects of its proofs of claim rather than the Debtors

having the burden of proving the Claims’ invalidity. Jn re

Lewis, 80 B.R. 39, 43 (Bankr. E.D. Pa. 1987) (mort-

gagee’s claim for late charges would be disallowed absent

showing of how charges were computed). The PBGC is

required to prove all elements of its Claims or those

portions not proven by the creditor must be disallowed.

The Exhibit is generally of no probative value and the

evidence is insufficient to establish the correct amount of

the Minimum Contributions Claims. The PBGC has not

met its burden to prove the Minimum Contrbutions

Claims by a preponderance of the evidence. Based upon

the lack of credible evidence regarding the components

of the $69,228,372 portion of the Minimum Contribution

Claims, $69,228,372 of the claim will be disallowed.

UNFUNDED BENEFIT CLAIMS

The Unfunded Benefit Claims are equal to the excess

of the benefits promised to the Debtors’ current and

former employees in today’s dollars over the current value

of funds in the trust fund at plan termination. The factual

issues regarding the amounts of these claims relate to the

method used by the PBGC to compute the value of its

claims, and whether there is an improper duplication be-

tween the Unfunded Benefit Claims and the Minimum

Contribution Claims.

Tla

1. Applicable rate and retirement age assumptions.

The PBGC, through its contract actuary, calculated the

Unfunded Benefit Claims by using figures provided by the

Master Plan’s enrolled actuary. The Master Plan’s en-

rolled actuary computed the figures using one set of as-

sumptions. The PBGC actuary converted the figures to

a different amount using a different set of assumptions.

Those revised assumptions were calculated according to

the provisions of 29 C.F.R. § 2619 (1991) (Regulation)

applicable at the time of plan termination. The purpose

of the Regulation is to establish a method of determining

the value of plan benefits under terminating pension plans

covered by the Employee Retirement Income Security Act

of 1974. The Regulation determines the current value of

projected benefits as of a specific date that is equal to the

amount of money needed on that date to pay benefits over

future years. The Regulation requires the plan admin-

istrator to determine the present value of all plan benefits

using the applicable formulas contained in the Regulation,

or any other formulas or approximations that are at least

as accurate, together with prevailing PBGC interest, ex-

pected retirement age, and mortality rates in effect at the

valuation date.

The Debtors challenged the expected retirement age

used in the calculation as not representative of the actual

experience of this plan, especially during the plan’s pre-

termination period. Pre-termination evidence is not con-

Clusive as it relates to this plan or the experience of the

plan once terminated. The court finds the more credible

evidence of the expected retirement age under terminated

plans is that experienced by the PBGC [sic] The PBGC is

familiar with a multitude of terminated plans as compared

to the Debtors’ experience with this specific plan in the

seven month post-termination period.

The Debtors also challenged the method used by the

PBGC in discounting its claims to present value. The

PBGC used as a component of that calculation a 6.5%

72a

interest rate.8 The interest rate, adjusted periodically by

the PBGC, reflects current conditions in the financial and

annuity markets. The most recent recalculation applicable

here raised the highest portion of the interest rate from

6 1/4% to 6 1/2%.° The Regulation replicates the mar-

ket price from an insurance company for the close out of

annuities from a terminated pension plan. The Regula-

tion produces a discount factor, not an interest rate. The

interest rate is applicable only in conjunction with the

other factors set forth in the Regulation. There is no evi-

dence the PBGC improperly calculated the Unfunded Ben-

efit Claims according to the Regulation. There is only a

dispute regarding whether the interest rate and expected

retirement age assumptions should be employed in this

case to discount the Claims.

The Debtors introduced evidence to illustrate that in

light of the PBGC’s historical record of its investment ac-

tivity, the use of the 6.5% rate would disproportionately

favor the PBGC and would result in the PBGC receiving

a profit from-the estate at the expense of other creditors.

The Debtors advocated two alternative interest rates to

substitute for the PBGC’s 6.5% rate. Evidence was pre-

sented of a debtor-specific approach that generated a rate

of 13.4%, and a prudent-investor approach that gen-

erated a rate of 12.3%. If the Unfunded Benefit Claims

were calculated using the 13.4% interest rate instead of

the PBGC’s 6.5% interest rate, the PBGC’s claim would

be reduced to approximately $114,398,000, almost one-

half of the amended Claims. If the Unfunded Benefit

8 The evidence indicates that the 6.5% figure is applicable to only

a part of the calculation, but because it is the largest percentage

used, will be referred to simply as the 6.5% rate.

® The adjustment to the interest rate is not subject to notice and

public comment. The PBGC indicated that to do so would be im-

practicable and contrary to public interest because the issuance of

new interest rates must be done promptly so that the rate can

reflect, as accurately as possible, current market conditions.

eT aay g

Se BVA ee.

73a

Claims were calculated using the 12.3% interest rate in-

Stead of the PBGC’s 6.5% interest rate, the PBGC’s claim

would be reduced to approximately $124,441,000. The

significance of the impact on other unsecured creditors

compels the court to weigh the evidence to determine

whether the PBGC’s calculation of its Claims unjustifiably

inflates its Claims to the detriment of the balance of the

Creditors in this case.

The court finds that there is little support for the use of

the debtor-specific approach, either in case law or as in-

dicated by the witnesses for both parties. The method

uses the pre-bankruptcy credit risk of the financially risky

Debtors to derive a rate. Other courts have rejected the

approach and the Debtors’ expert had little enthusiasm for

the method.

The prudent-investor approach attempts to determine

what a prudent investor could expect to earn on the port-

folio of assets available at the time of termination. The

prudent-investor approach allocated the mix of investment

of fund assets in a balanced portfolio that contained sixty

per cent equities and forty per cent fixed income securi-

ties. Such investments would yield 12.3% [sic] The

prudent-investor approach was carefully developed analyz-

ing generally accepted source materials used in financial

markets and was introduced by a witness qualified by this

court as an expert on the calculation of the present value

of claims in bankruptcy cases,

The prudent-investor approach, however, fails to ac-

count for immediate cash draws against the fund. Since

the approach did not include a cash reserve, there was no

consideration of how that may affect the yield. The

prudent-investor approach also produced a rate that was

generally higher than many large pension plans projected

they would receive on long term investments. The ap-

proach also assumes a risk factor that may be inconsistent

with the PBGC’s statutory role as a guarantor of pension

funds, and fails to provide adequate compensation to the

74a

PBGC for the assumption of additional risk. The Debtors

argue that the PBGC has already been compensated for

any risk through receipt of premiums previously paid by

the Debtors. The court rejects that argument. The Debt-

ors’ argument does not account for risk that may be en-

countered by the PBGC in the future. The PBGC interest

rate is also only one part of a three part formula required

by the valuation regulations. If one portion of the for-

mula is modified, then the presumptions as to the ex-

pected retirement age and the mortality rates also required

modification. Utilization of the interest rate set forth in

the prudent-investor approach does not replicate the mar-

ket price from an insurance company for the close out of

annuities from a terminated pension plan.

Evidence indicated that the PBGC should not utilize a

risk-free rate, but should be allowed a rate that reflects

the riskiness of the stream of payments and the organiza-

tion insuring it. Such a low-risk rate may be equivalent

to a federal agency rate rather than the United States

treasury rate. No evidence was offered regarding a spe-

cific low-risk rate other than the 6.5% interest rate pro-

vided by the valuation regulations. The PBGC’s interest

rate is not designed solely to enhance its claims and the

interest rate is not inconsistent with the risk the PBGC

should be required to incur.

The court has considered all the evidence relating to

the multitude of rates advocated by the parties, and

whether equitable factors unique to this bankruptcy filing

should influence the selection of that interest rate. Such

consideration included recognition of the PBGC’s obliga-

tion to guarantee performance on all defaulted pensions

plans, its obligation to provide conservative investment

management, the interrelationship of the various factors

used by the PBGC to arrive at an appropriate discount

factor, as well as the impact the choice of interest rate

has on other creditors. It is undisputed that calculation

of the PBGC’s Unfunded Benefit Claims according to all

i i a aa ee

1 PE a ere aE

75a

elements of substantive non-bankruptcy law will severely

impact the distribution to other similarly situated credi-

tors. That is but one element the court should consider

because allowance of one claim almost always adversely

impacts the distribution to the remaining creditors in the

same class. If, however, the rate employed by the PBGC

was designed to improperly enhance the Unfunded Benefit

Claims at the expense of the other creditors, the court

has authority to modify the rate. In re Chateaugay Corp.,

130 B.R. 690, 696 (S.D.N.Y. 1991) (adopting bank-

ruptcy court report and recommendation as giving proper

credit to PBGC’s ability to calculate value of future li-

abilities according to agency procedures reported at 115

B.R. 760, 771 (Bankr. S.D.N.Y. 1990)). Reduction in

the interest rate used by the PBGC should be done only

if there is manifest unfairness or unreasonableness. If not,

the PBGC’s regulations should be given due deference.

Batterton v. Francis, 432 US. 416, 425-26 (1977). The

court should also be circumspect in engaging in judicial

review on a case-by-case basis when a regulatory scheme

is devised that takes into consideration a larger constitu-

ency. Dunivent v. Schollett, (In re Schollett) 1992 WL

347228 (10th Cir., Nov. 25, 1992).

Based upon the weight of the evidence and upon all

applicable equitable factors, the court will not disturb the

application of the PBGC valuation regulations to this

case. The appropriate interest rate to be utilized in dis-

counting the PBGC’s Unfunded Benefit Claims to present

value is 6.5% utilizing the methodology provided by the

Regulation.

2. Claim Duplication

Part of the assets of the Master Plan include the unpaid

Minimum Contribution Claims. The court previously

ruled that the Unfunded Benefit Claims owed to the

PBGC and the Minimum Contribution Claims owed to the

Master Plan were disallowed to the extent that they over-

76a

‘lapped or were duplicative of each other. The amount of

the Unfunded Benefit Claims is comprised of the amount

‘of the plan liabilities of $254,300,000, less the value of

the plan assets as of the date of termination. The evi-

dence indicates that after offsetting the assets of the ter-

minated plan the amount of the remaining Unfunded

Benefit Claims is $222,866,000. This figure does not re-

flect a reduction for the value for the unpaid Minimum

Contributions Claims that are also assets of the plan on

the date of plan termination.

The PBGC was able to employ a reiterative process to

calculate the value assigned to its $71,223,000 Minimum

Contribution Claims pursuant to information contained

in the Debtors’ proposed plan. The PBGC assigned a

value of $11,013,000 to those claims and further dis-

counted the value of the Minimum Contribution Claims

to $10,580,000. Subtracting the value of the Minimum

Contribution Claims (a plan asset) from the Unfunded

Benefit Claims, as calculated by the PBGC, produced a

total Unfunded Benefit Claim of $212,286,000. This

process does not reduce the Unfunded Benefit Claims by

the total amount of the Minimum Contribution Claims.

The process used by the PBGC only reduces the Un-

funded Benefit Claims by the amount of the PBGC’s

probable recovery on the Minimum Contribution Claims.

In this case, giving the PBGC credit for the probable

value of the Minimum Contribution Claims, a plan asset,

as opposed to the dollar amount of the claim, provides

the correct determination of the total Unfunded Benefit

Claims. The determination of value is analogous to treat-

ment of a secured claim under 11 U.S.C. § 506 where

the value of the collateral and, correspondingly the

‘amount of a creditor’s secured claim may vary according

to the intended use of the property or the purpose for

which the valuation is made. In re Weber, 140 B.R. 707,

710 (Bankr. S.D. Ohio 1992) (if debt not paid accord-

ing to its terms, there will be slippage between value of

77a

Property, based on appropriate market standard, and

amount creditor will receive). The PBGC’s calculation of

its Minimum Contribution Claims contains the $69,228,372

claim presently disallowed by the court. The reiterative

calculation process is not accurate at this point to the ex-

tent that it incorporates the total value of the disallowed

claim and accounts for a recovery the PBGC will not re-

ceive. However, once the PBGC incorporates this correc-

tion in its reiterative calculation of the amount of the

Minimum Contribution Claims, the methodology elim-

inates any duplication prohibited by the court’s prior

order.

Based upon the foregoing, it is hereby

ORDERED, that the allowed amount of normal pen-

sion costs entitled to priority under 11 U.S.C. Section

507(a) (4) is $429,232: and it is further

ORDERED, that the allowed amount of normal pen-

sion costs entitled to administrative expense status under

11 U.S.C. Section 507(a)(1) is $1,565,198; and it is

further

ORDERED, that the remaining amount of the Mini-

mum Contribution Claims in the amount of $69,228 372

is disallowed; and it is further

ORDERED, that the Unfunded Benefit Claims shall be

calculated and allowed utilizing the interest rate set forth

in the Regulation that was in effect as of the date of the

termination of the Master Plan: and it is further

ORDERED, that the unsecured claim for the Unfunded

Benefit Claims is allowed in an amount utilizing the reit-

erative process to value the Minimum Contribution

Claims; and it is further

ORDERED, that the PBGC recalculate the amount of

the Unfunded Benefit Claims utilizing the reiterative

method after adjustment for the disallowance of $69,228 -

372 of the Minimum Contribution Claims; and it is fur-

ther

78a

ORDERED, that if the amount to be received by the

PBGC on its Claims pursuant to the Debtors’ plan, if con-

firmed, is further modified by the Debtors or by other

factors outside the scope of this opinion, the PBGC shall

amend its Claims accordingly to correctly reflect the ad-

justed recovery.

DATED this 31 day of December, 1992.

/s/ Judith A. Boulden

JUDITH A. BOULDEN

United States Bankruptcy Judge

ee ee ee «Ue Fe Ye Se es US RT SE eRe ON, ‘ CPOE Ea en

79a

[Filed Nov. 9, 1992]

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF UTAH

CENTRAL DIVISION

Jointly Administered Under

Under Case No. 90B-6721

[Chapter 11]

IN RE: CF&I FABRICATORS OF UTAH, INC. et al.,

Debtor.

(Case No. 90B-6721)

(CF&I Fabricators of Utah, Inc. )

(Case No. 90B-6722)

(Colorado & Utah Land Co.)

(Case No. 90B-6723)

(Kansas Metals Company)

(Case No. 90B-6724)

(Albuquerque Metals Company)

(Case No. 90B-6725)

(Pueblo Metals Company)

(Case No. 90B-6726)

(Denver Metals Company)

(Case No. 90B-6727)

(Pueblo Railroad Service Co.)

(Case No. 90B-6728)

(CF&I Fabricators of Colorado, Inc. )

(Case No. 90B-6729)

(CF&I Steel Corporation)

(Case No. 90B-6730)

(The Colorado and Wyoming Railway Company)

80a

MEMORANDUM DECISION AND ORDER

RELATING TO DEBTORS’ OBJECTIONS,

DATED 10/02/92, TO TWENTY AMENDED

PROOFS OF CLAIM FILED BY PENSION

BENEFIT GUARANTY CORPORATION

On November 7, 1990, these related steel production

companies (Debtors) filed petitions under Chapter 11, in

large part in an attempt to reorganize in light of their

inability to fund two “defined benefit” pension plans. Al-

though the Debtors, the Unsecured Creditors Committee

(Committee) and the Pension Benefit Guaranty Corpora-

tion (PBGC) have been in negotiating relative to the

amount and priority of the PBGC’s claims arising from the

Debtors’ inability to fund the plans, the issues are joined

and presented to the court for the first time in this claims

objection hearing on November 9, 1992, six days prior

to the hearing on the adequacy of the Debtors’ disclosure

statement. Resolution of the legal issues is critical be-

cause the Debtors’ hopes for reorganization center upon

an Asset Purchase Agreement of portions of the Debtors’

assets implemented through a proposed plan of reorgan-

ization. The prospective purchaser apparently requires res-

olution by court order of these, and other, issues by Sun-

day, November 15, 1992, or its participation in the

Debtors’ reorganization will be withdrawn. In light of

these pressing dates, the court has reduced to writing its

rationale in determining certain legal issues, although in

so doing recognizes that style may succumb to expediency.

FACTS

At the time of filing, the Debtors were sponsors and

CF&I Steel Corporation (CF&I) was the administrator of

two pension plans which provided pension and pension-

related benefits for employees and retirees. These two

pension plans are (1) The Pension Plan of CF&I Steel

Corporation and Certain Subsidiaries (the Master Plan)

and (2) The Non-Contributory Pension Plan of CF&lI

8la

Steel Corporution as Amended and Restated Effective

January 1, 1989, (the Non-Contributory Plan). Under

these pension plans, CF&I promised to provide fixed pen-

sion benefits, the amount of which is calculated with ref-

erence to each employee’s pay and years of service.

CF&I was obligated to provide annual plan funding con-

tributions based on the actuarial valuation of the benefits

earned by its employees.

PBGC is a wholly-owned United States government cor-

poration established under § 4002 of the Employee Re-

tirement Income Security Act of 1974 ( ERISA), 29

U.S.C. § 1302, to administer the pension plan termination

provision of Title IV of ERISA, 29 U.S.C. §§ 1302-1461.

PBGC is required to guarantee payment of non-forfeitable

or vested benefits under terminated pension plans, subject

to certain limitations.

CF&I failed to make the minimum funding payment

that became due on the Master Plan on September 15,

1990. On November 7, 1990, 23 days after payment of

the quarterly minimum fund'ng installment was due, the

Debtors filed petitions for reorganization under chapter 11

of the United States Bankruptcy Code (Code). The

Debtors’ separate cases were later procedurally consoli-

dated for joint administration.

On March 13, 1991, PBGC filed two proofs of claim

against each of the Debtors in connection with the Master

Plan. These claims fall into two general categories: (1)

claims for unfunded benefit liabilities under the Master

Plan (the Unfunded Benefit Claims) designed to reim-

burse PBGC for at least a portion of the amounts that it

must pay to pensioners from its own funds, and ( 2)

claims for due and unpaid minimum funding contributions

allegedly due and owing the Master Plan (the Minimum

Contribution Claims) (collectively the Claims).

The Debtors’ attempted to persuade PBGC to terminate

the Master Plan both before and after filing the chapter

82a

11 petitions. On March 19, 1992, approximately sixteen

months after the bankruptcy filing, PBGC instituted pro-

ceedings to terminate the Master Plan. The Non-Contrib-

utory Pension Plan has not been terminated. CF&lI, on

behalf of the Master Plan, consented to the termination

and entered into a trusteeship agreement with PBGC ef-

fective March 19, 1992. Pursuant to this agreement,

PBGC became the successor trustee of the Master Plan.

The PBGC also became liable for guaranteed benefits to

plan participants.

On July 31, 1992, after termination of the Master Plan,

PBGC amended its proofs of claims, increasing the

amount of each of the ten Unfunded Benefit Claims to an

estimated amount of $263,200,0001 and the amount of

each of the ten Minimum Contribution Claims to an esti-

mated amount of $64,874,511. PBGC filed the Unfunded

Benefit Claims as priority claims. PBGC asserted its

priority claim on the premise that the Master Plan had

an insufficiency of assets to discharge its benefit liabilities,

as defined in ERISA § 4001(a)(18), 29 U.S.C. § 1301

(a)(18).

PBGC asserts that, pursuant to § 4062(b) of ERISA,

29 U.S.C. § 1362(b), each of the Debtors is jointly and

severally liable to the PBGC for the amount of Unfunded

Benefit Claims on the termination date of the Master

Plan, plus interest calculated from that date. PBGC as-

serts that it has a lien limited to 30% of the collective

net worth of the Debtors ? that arose as of the termination

date of the Master Plan. ERISA § 4068(a), 29 U.S.C.

§ 1368(c)(2). PBGC asserts that in bankruptcy cases,

the 30% liability is treated in the same manner as a tax

1The Debtors dispute the amount and have provided more cur-

rent actuarial data to PBGC that may result in a lower figure.

2 The collective net worth has not yet been determined by PBGC

but it is preliminarily estimated to be approximately $10,000,000.

Thus, PBGC asserts the amount subject to a lien is approximately

$3,000,000.

PIS Ee Teg ee Ob a

ee serie Oeste at ave aol OS Rarew ne

on aR RRP BLOG

83a

due and owing to the United States for purposes of Title

11 of the United States Code. ERISA § 4068(c)(2), 29

U.S.C. § 1368(c)(2). Therefore, the amount of the Un-

funded Benefits Claim representing 30% of the Debtors

net worth is entitled to administrative expense priority as

a tax incurred by the estate pursuant to 11 U.S.C. §§ 503

(b)(1)(B) and 507(a)(1). Alternatively, if the court de-

termines any part of the Unfunded Benefit Claims is not a

tax incurred by the estate, PBGC asserts priority for the

same amount consisting of 30% of the Debtors’ net worth

pursuant to 11 U.S.C. § 507(a)(7), with any amount not

determined to be entitled to priority to be allowed as a

general unsecured claim. The Unfunded Benefit Claims

are subject to reduction upon determination by the PBGC

of the value of the claim for unpaid minimum funding

contributions.

The Minimum Contribution Claims filed by PBGC as-

sert unsecured claims for $1,000,000 with the balance of

$63,874,511 as priority unsecured claims. PBGC asserts

priority status for these claims because, pursuant to

ERISA § 302(f), 29 US.C. § 1082(f) and LR.C.

§ 412(n), 26 U.S.C. § 412(n), any amount with respect

to which a lien is imposed shall be treated as taxes due

and owing the United States. Therefore the Minimum

Contribution Claims, in an amount estimated to be

$50,460,452 plus interest, are entitled to priority pursuant

to 11 U.S.C. §$§ 503(b)(1)(B) and 507(a)(1). PBGC

also asserts that interest on the claims arising prior to and

during the administration of the estates is entitled to prior-

ity treatment. Alternatively, if the court determines any

part of these claims not to be an administrative priority

tax, PBGC asserts priority under 11 U.S.C. § 507(a)(7).

PBCC asserts that any amounts accruing for unpaid mini-

mum funding contributions from the filing date to the

date the plan was terminated, estimated to be $37,680,-

574, are entitled to priority pursuant of 11 U.S.C. $$ 503

(b)(1)(A) and 507(a)(1). Debt for unpaid minimum

funding contributions that is attributabic to the 180 days

84a

prior to the filing of the chapter 11 petitions, estimated to

be $8,164,995, is entitled to priority treatment pursuant

to 11 U.S.C. §507(a)(4). A remaining portion of the

claims estimated to be in the amount of $13,414,059 is

asserted by PBGC to be entitled to priority under 11

U.S.C. § 507(a)(7). The balance of the claims in the

amount of $1,000,000 is a general unsecured claim.

On October 2, 1992, the Debtors, supported by the

Committee,® filed objections to the twenty Claims, setting

hearings thereon for November 10, 1992. On October 22,

1992, the PBGC moved to withdraw the reference to the

district court for determination of these issues. The dis-

trict court has not yet ruled on PBGC’s motion for with-

drawal of reference. The parties agreed to advance the

hearing date to November 9, 1992, for this court’s con-

sideration of certain legal issues, prior to any determina-

tion of remaining factual issues. The Debtors, PBGC, the

Committee and the Untied [sic] Steel Workers of Amer-

ica* argued their various positions at the November 9,

1992, hearing.

LEGAL ISSUES

The parties raise various preliminary legal issues related

to the Claims and the priority that should be afforded to

them. Based upon the memoranda and argument of the

parties, and the independent research of the court, the

court hereby determines the legal issues in the same order

raised by the Debtors.

3 The Committee has participated fully is the issues in dispute

here. The Committee’s argument presented in its supporting mem-

oranda generally tracks and supports the position of the Debtors.

Where reference is made to the position of the Debtors, the court

acknowledges that the Committee’s position is similar.

*The United Steel Workers of America did not submit a legal

memoranda briefing the various issues but appeared at the hearing

on the oral argument in support of the Debtors’ and the Commit-

tee’s objection to the PBGC’s Claims.

;

& etki

85a

I. The Debtors assert the Claims are improperly in-

flated because (1) the Unfunded Benefit Claims

duplicate the Minimum Contribution Claims, (2)

the use of the concept of joint and several liability

inflates the Claims, (3) the bankruptcy court, not

the PBGC, should determine the appropriate dis-

count rate to be used in calculating the Claims,

and (4) interest should not be allowed on the

Minimum Contribution Claims.

(1) Duplicate Claims

The Debtors argue that the PBGC is asserting a claim

in its individual capacity, and also in its capacity as suc-

cesor trustee of the Master Plan, thus doubling the amount

owed by the Debtors. PBGC asserts its claims for termi-

nation liability represent the total amount of unfunded

benefit liabilities as of the termination date of all partici-

pants and beneficiaries under the plan. PBGC calculates

the amount of unfunded benefit liabilties to be the excess

of the present value of benefit liabilities over the current

value of assets in the plan at termination. PBGC acknowl-

edges that the amount of the Unfunded Benefit Claims

are subject to reduction once the value to the plan of

the Minimum Contribution Claims can be determined,

but argues that the value of a claim to be collected in

the future is not its face value.

The pleadings on file do not reflect the method PBGC

used to calculate its Claims. If PBGC merely duplicated

the Claims because it had assigned no present value to

the Minimum Contribution Claims, the Claims are unsup-

ported by fact and should be disallowed. If the PBGC

has in fact discounted the Minimum Contribution Claims

to present value, that fact and the amount of the present

value discount has not been set forth in the pleadings.

The inter-relatedness of the Claims has not been sub-

stantiated by any factual presentation. Until the amount

of inter-relatedness is disclosed and supported by the

86a

claimant, the duplicate portion which the Debtors assert

is the entire amount of the Minimum Contribution Claim

should be disallowed.

(2) Joint and Several Liability

The Debtors complain that the multiple Claims filed by

PBGC under the theory of the joint and several liability

of these Debtors improperly inflates the Unfunded Benefit

Claims and the Minimum Contribution Claims. The

Debtors argue that under ERISA, joint and several liabil-

ity means that all assets of all members of a controlled

group are available for recovery by PBGC on a single

claim, not on multiple claims. The effect of the multiple

claims, assert the Debtors, is to allow PBGC to receive the

same percentage recovery as other creditors, multiplied by

the number of Debtors in these cases. The Debtors would

prefer that PBGC be allowed a single claim to be allo-

cated among the Debtors based on equitable principles.

The Debtors rely on Pension Benefit Guaranty Corp. v.

Ouimet Corp., 711 F.2d 1085, 1090-92 (1st Cir. 1983),

cert. denied 464 U.S. 961, 104 S.Ct. 393 (1983) as sup-

port for equitable allocation of joint and several termina-

tion liability. In that case, the circuit court reviewed the

bankruptcy court’s determination of net worth and alloca-

tion of liability between nondebtor solvent members of a

controlled group and the creditors of two bankrupt insol-

vent wholly-owned subsidiaries. On remand, the bank-

ruptcy court had found sufficient assets to satisfy the en-

tire liability claim and also devised a method of allocation

among the nondebtor solvent members of the control

group. The issue of joint and several liability was not

before either the bankruptcy court or the circuit court.

The circuit court adopted the bankruptcy court’s alloca-

tion of liability among the nondebtor solvent entities based

on their relative net worth but remanded for a second

time to resolve the liability between the solvent and in-

solvent identities. Jd. at 1096. This case does not pro-

87a

mote the Debtors’ position regarding equitable allocation

of joint and several liability in the present case.

PBGC responds that each member of its controlled

group is jointly and severally liable under ERISA § 4062

(a), 29 U.S.C. § 1362(a), but that it acknowledges that

it is limited to a single recovery. PBGC’s position is con-

sistent with the statute and with case law. Tavery y.

United States, 897 F.2d 1032, 1034 (10th Cir. 1990).

Congress’ intent under the statute is quite clear. Each of

the Debtors is to bear the full burden of the liability to

PBGC, except to the extent that only one recovery may

be obtained. It may well impact adversely on other credi-

tors, but the principles of equal distribution to creditors

are not so offended as to override the direct intent of

Congress under ERISA.

(3) Discount Factor

ERISA § 4062(b)(1), 29 U.S.C. § 1362(b)(1), pro-

vides that termination liability under the statute is cal-

culated from the termination date in accordance with

regulations prescribed by the PBGC. Apparently, when

an underfunded plan terminates, the PBGC is charged

with determining the amount of unfunded guaranteed ben-

efits under the plan. The PBGC is also charged with de-

termining the present value of all future plan benefits

when a plan is terminated, ERISA § 4001(a)(18), 29

U.S.C. § 1301(a)(18), and applies a range of discount

rates for the purpose of determining termination liability,

29 C.F.R. pt. 2619 (valuation of Benefits in Nonmulti-

employer Plans), dependent on when the plan will have to

pay out benefits. LTV Corp. v. Pension Benefit Guaranty

Corp., (In Re Chateaugay Corp.), 115 BR. 760, 767

(Bankr. S.D.N.Y. 1990). There is no evidence at this

point in these cases relative to what assumptions are con-

tained in the valuation regulations. PBGC asserts, how-

ever, that the appropriate rate to be used is only one of

a myriad of factors used to determine the market value

of PBGC’s claim for unfunded benefit liabilities. Since the

88a

court ruled, as set forth below, that these Claims arose

pre-petition, the court must determine if the Claims, as

drafted, are allowable pursuant to 11 U.S.C. § 502, or

should be disallowed for any of the enumerated reasons

set forth therein.

The Debtors argue that PBGC should not be allowed

to apply its own, unilaterally-announced, discount rate in

calculating the present value of the future benefits owed

to retirees under the Master Plan. The Debtors’ cite sev-

eral cases dealing with the ability of the bankruptcy court

to determine what discount rate should be applied to de-

termine the value of a claim payable over time. Jn re

Hardzog, 901 F.2d 858, 859-60 (10th Cir. 1990); In re

Loveridge Mach. & Tool Co., 36 B.R. 159, 165-70

(Bankr. D. Utah 1983). These cases, however, ordinarily

refer to the ability of the court, once a claim has been

established, to provide for the payment of that claim over

time in such a manner as to fairly compensate the creditor

for failing to receive the payment in cash at a specific

time. In LTV Corp., the bankruptcy court found, and

the district court adopted, that PBGC advocates that it is

entitled to promulgate and enforce, even in a bankruptcy

case, regulations that violate fundamental bankruptcy pro-

visions and principles that require fair and uniform dis-

tribution among creditors. LTV Corp., 115 B.R. at 768.

In this case, no such evidence has yet been presented

to the court. Absent such evidence at this preliminary

stage, it would be inappropriate for this court to assume

that PBGC calculations are per se violative of the basic

precepts of the Bankruptcy Code. In light of the statutory

scheme and the underlying goals supporting ERISA, this

court shall afford due deference to the PBGC’s determina-

tion of the amount of its claims and such determination

shall have substantial weight in this court’s ultimate de-

termination under 11 U.S.C. § 502(b). Under § 502(b)

of the Bankruptcy Code, this court retains its obligation

to determine the amount of the PBGC’s disputed claim

EE. LO REE GEE LT CT a Ee ee

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89a

and such determination includes certain equitable consid-

erations driving the over-riding policy goals advanced by

the Bankruptcy Code. Vanston Bondholders Protective

Comm. v. Green, 329 U.S. 156 (1946). This court will

determine the amount of the PBGC claim upon presenta-

tion of further evidence indicating that some unfair and

unreasonable advantage exists in favor of PBGC and

against the creditors of the estate.

(4) Interest Accrual

PBGC asserts that it is entitled to interest on the Mini-

mum Contribution Claims on the basis that such claims

are post-petition taxes. PBGC offers no other basis for

the allowance of interest. As set forth below, the Mini-

mum Contribution Claims are not equivalent to post-

petition taxes. Administrative expense claims are not en-

titled to interest. Jn re John Clay and Company, Inc..

43 B.R. 797 (Bankr. D. Utah 1984). Unless these

Debtors are solvent, unsecured creditors are not entitled

to post-petition interest on their claims. In re Kentucky

Lumber Co., 860 F.2d 674, 676-79 (6th Cir. 1988).

If. The Debtors’ assert the Claims are not entitled to

priority under 11 U.S.C § 507(a)(1) because

(1) they arise from pre-petition services by CF&I’s

employees, (2) they should not be allowed as ad-

ministrative claims under 11] U.S.C. § 503(b) (1)

(A), and (3) the Claims should not be allowed

as administrative tax claims under 11 U.S.C. § 503

(b)(1)(B) because they are not tax claims,

PBGC did not have a lien pre-petition and was

prevented from acquiring one posi-petition because

of the automatic Stay.

(1) Date Liability Arises

PBGC maintains that the Post-petition termination of

the Master Plan entitles the Unfunded Benefit Claims to

Post-petition administrative status pursuant to 11 U.S.C.

i i, ye

90a

§ 503(b)(1)(B).° The Debtors assert that, because the

Claims arose as a result of the pre-petition service of the

plan participants, the Claims represent pre-petition debt.

These issues were thoroughly reviewed in LTV Corp. v.

PBGC, (In re Chateaugay Corp.), 15 B.R. 760, 772-778

(Bankr. S.D.N.Y. 1990), applying the standard set forth

in In re Mammoth Mart, Inc., 536 F.2d 950, (1st Cir.

1976). In LTV Corp. the bankruptcy court found that

PBGC’s claim arose from pre-petition transactions because

the triggering event was not the termination of the plans

by the PBGC, but rather the pre-petition labor of LTV

Corp.’s employees, citing In re Johns-Manville Corp., 57

B.R. 680, 688 (Bankr. S.D.N.Y. 1986), and In re

Chateaugay Corp., 102 B.R. 335, 351 (Bankr. $.D.N.Y.

1989). The LTV Corp. court indicated that even a post-

petition breach will be treated as giving rise to a pre-

petition liability where the contract was executed pre-

petition. LTV Corp., 115 B.R. at 774, relying on In re

Chateaugay Corp., 87 B.R. 779, 796 (S.D.N.Y. 1988),

aff'd sub nom. PBGC v. LTV Corp., 875 F.2d 1008 (2d

Cir. 1989), rev’d on other grounds, 496 U.S. 633, 110

S.Ct. 2688, 110 L.Ed.2d 579 (1990), and NLRB vy.

Bildisco & Bildisco, 465 U.S. 513, 104 S.Ct. 118, 79

L.Ed.2d 482 (1984). PBGC relies on Columbia Packing

Co. v. Pension Benefit Guar. Corp., 81 B.R. 205 (D.

Mass. 1981) in which the district court indicated “the

past service liability cost is more properly viewed as an

actuarial unit of measure for determining the employer’s

current periodic contribution than as compensation for

work performed before the inception of the plan”. Colum-

bia, 81 B.R. at 209. The court then reasoned that both

the normal cost and the past service liability cost of an

employer’s contribution “arise from” service rendered dur-

ing the period in which the contribution accrues.

5 PBGC has not presented an argument that the Unfunded Bene-

fit Claims were incurred to preserve the estate and as such should

be afforded priority under 11 U.S.C. section 503(b)(1)(A).

9la

The Debtors’ view the issue as one of the claims arising

When the underlying obligation to the employee was in-

curred. The PBGC asserts the claims arise when the

employer’s liability to the Master Plan for the unpaid

minimum funding contribution was incurred, and that the

liability at issue is not the Master Plan’s liability to the

participants, but the sponsor’s liability to the Master Plan.

This court concludes that the better reasoning mandates

that the point in time when the acts giving rise to the

alleged liability were performed is the appropriate measure.

In re Johns-Manville Corp., 57 BR. 680, 688 (Bankr.

S.D.N.Y. 1986); see also In re Amerex, 853 F.2d 1526

(10th Cir. 1988; In re Godwin Bevers Co., 575 F.2d 805,

807 (10th Cir. 1978). The termination of the Master

Plan only substituted the PBGC as the successor in inter-

est to the Master Plan’s pre-petition claims. To rule other-

wise would allow the PBGC to improperly advance its

position as a result of its post-petition actions. See e.g.,

Grady v. A.H. Robins Co., 839 F.2d 198, 202 (4th Cir.

1988) cert. dismissed sub nom.: Joynes v. A.H. Robins

Co., 487 U.S. 1260, 109 S.Ct. 201 (1988).

PBGC a

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