In re Norrenberns Foods, Inc. (Bankr. S.D. Ill.)

The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. Ca., Ret.), analyzing a recent decision of interest: 

SUMMARY

The United States Bankruptcy Court for the Southern District of Illinois (the Court) recently ruled that a chapter 11 debtor may sell all of its assets free and clear of successor liability claims relating to the debtor’s withdrawal from pension plans under the authority of Bankruptcy Code (Code) § 363(f)(5). In re Norrenberns Foods, Inc., 2022 WL 2657213 (Bankr. S.D. Ill. July 8, 2022).

To view the opinion, click here. 

FACTS

When Debtor, Norrenberns Foods, Inc., filed a petition under Subchapter V of Chapter 11, it operated a retail grocery store in Mascoutah, Illinois, the last remaining open grocery store of several owned by the Debtor throughout southern Illinois. The other stores had previously closed due to lack of profitability. The Debtor had entered into collective bargaining agreements (CBA’s) with the United Food and Commercial Workers International Union (the Union) covering its employees at all of the store locations. The United Food and Commercial Workers Unions and Employers Midwest Pension Fund (the Fund) is a multi-employer pension fund that provides retirement, disability and death benefits to retail food employees covered by CBA’s in the Midwest, including the pertinent Union here. As the Debtor closed each store, it withdrew that store from the Union and the Fund, resulting in “withdrawal liability” under the federal Employee Retirement Income Security Act (ERISA). The entire withdrawal liability of almost five million dollars became an unsecured claim in the Chapter 11.

This large liability caused the Debtor to be unable to service its one secured creditor, Citizens Community Bank (the Bank), which had perfected security interests in all of the Debtor’s real and personal property. This default precipitated the bankruptcy filing. After extensive marketing, the Debtor located a buyer for all assets on terms which were satisfactory to the Bank. It filed a motion to sell under the terms of which the buyer would be free and clear of all successor liability, including the Fund’s unsecured claim. The sale motion relied on the provisions of § 363(f)(5), which allows a sale free and clear of an interest if “such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.” The offer to purchase was conditioned on the sale being free and clear of such successor liability. The Fund objected to the sale free and clear, arguing that the Court lacked jurisdiction to enjoin the successor liability claims and asserting that the sale could not extinguish its successor liability claims.

After an evidentiary hearing, the Court approved the sale free and clear of successor liability to the Fund.

REASONING

The Court first observed that the Fund could be compelled to accept a money satisfaction such that the provisions of § 363(f)(5) would apply. The thorny issue in dispute was the meaning of the term “interest” in the subsection, with the Fund asserting that its successor liability claims did not qualify as such “interest” in the property being sold and the Debtor arguing to the contrary. After reviewing the statute, case law, and treatise authority, the Court agreed with the Debtor.

It first noted that “the trend [in the cases] seems to be in favor of a broader definition that encompasses other obligations that may flow from ownership of the property,” citing 3 COLLIER ON BANKRUPTCY ¶ 363.06 (2022). It reviewed significant cases which had included in the definition of “interest” possessory interests, employment related claims and withdrawal liability, such as pertinent here. Finding that Seventh Circuit cases argued by the Fund were factually and legally distinguishable and therefore that no controlling precedent existed, the Court looked at other circuit court decisions on similar issues. The Fourth Circuit in In re Leckie Smokeless Coal Co., 99 F 3d 573 (4th Cir. 1996) allowed a sale free and clear of successor liability for future payment obligations to retirement benefit plans required under the Coal Act, strikingly similar to the ERISA-created liabilities here. Similarly, the Third Circuit in In re Trans World Airlines, Inc., 322 F. 3d 283 (3rd Cir. 2003), had allowed a sale free and clear of successor liability for employment discrimination claims and a travel voucher program, finding these claims were an “interest in property” as defined in § 363(f).

Applying the reasoning of this line of cases to its facts, the Court observed that the Fund’s claims only arose “from the very grocery store assets being sold.” On this basis, it concluded that the claims were a qualifying “interest” and a sale free and clear of successor liability was authorized by the Code.

AUTHOR’S COMMENTS

Although not precedent, this a significant ruling. First, I would note that the Debtor here tried hard to find a buyer and when it finally was successful, that buyer understandably wanted assurance that it would not also be buying successor liability for the Fund withdrawal liability. Without this approval, there likely would be no sale, the assets would be auctioned at scrap yard prices, and the unsecured creditors would most likely realize nothing. Second, it echoes the trend to broadly define the term “interest” as noted by Collier’s. Finally, almost any time an operating business must terminate its participation in a pension fund, huge withdrawal liabilities will be incurred, so this is a circumstance likely to repeat. Although nonprecedential authority existed that might have allowed the cities of Stockton and San Bernardino to terminate their participation in the huge California employee pension plan commonly known as CALPERS in their chapter 9 cases, neither chose to do so because the withdrawal liability for both would have been immense, overshadowing all other unsecured debt. Of course, no sale of assets free and clear was at issue in those cases, but the existence of withdrawal liability had an impact on their reorganization efforts. The ability of a business to sell valuable assets free and clear of successor liability for such withdrawal liability would maximize the ability to generate funds to pay creditors.

This review was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. Ca., Ret.), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.