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UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF NEW YORK

In re: THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC., et al. Debtors.

) ) ) ) ) ) ) )

Chapter 11 Case No. 10-24549 (RDD)

Jointly Administered

  FOOD EMPLOYERS LABOR RELATIONS ASSOCIATION AND UNITED FOOD AND COMMERCIAL WORKERS PENSION FUND’S SUPPLEMENTAL BRIEF

SLEVIN & HART, P.C. 1625 Massachusetts Ave., NW, Suite 450 Washington, DC 20036 (202) 797-8700 Barry S. Slevin, Esq. Jeffrey S. Swyers, Esq. Laura Offenbacher Aradi, Esq. HALPERIN BATTAGLIA RAICHT, LLP 555 Madison Avenue, 9th Floor New York, NY 10022 (212) 765-9100 Alan D. Halperin, Esq. Donna H. Lieberman, Esq. Julie D. Dyas, Esq. Co-Counsel for the Food Employers Labor Relations Association and United Food and Commercial Workers Pension Fund

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TABLE OF CONTENTS TABLE OF AUTHORITIES ......................................................................................................... iii PRELIMINARY STATEMENT .....................................................................................................1 DISCUSSION ..................................................................................................................................3 I. II. The Pension Fund is entitled to recover the post-petition portion of A&P’s withdrawal liability as an administrative claim. ......................................3 When calculating the portion of the Pension Fund’s withdrawal liability claim that is entitled to administrative expense priority, the Court must give effect to both ERISA and the Bankruptcy Code .........................................................................................................................5 A. The calculation of the Pension Fund’s administrative claim must take into account the Pension Fund’s status as a “defined benefit” plan under ERISA ....................................................6 The calculation of the Pension Fund’s administrative claim must take into account the fact that, by its participation in a multiemployer defined benefit pension fund, A&P promised to help fund a portion of all the benefits payable under the Pension Fund, not just the benefits payable to its own employees.........................................................8 1. ERISA prohibits the Reorganized Debtors from defining the scope of A&P’s post-petition withdrawal liability obligation solely based on the post-petition benefit accruals of A&P’s own employees ........................................................................................9 The Reorganized Debtors’ post-petition withdrawal liability obligation to the Pension Fund must be based on its proportionate share of the entire Pension Fund’s unfunded liabilities ...............................................12

B.

2.

III.

The $7,219,172 post-petition portion of the Pension Fund’s withdrawal liability claim is entitled to priority as an administrative expense ...........................................................................................13 A. The Pension Fund’s administrative claim calculation complies with ERISA because it apportions A&P’s total withdrawal liability obligation between the pre- and postpetition time periods ..................................................................................13 i

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B.

The Pension Fund’s administrative claim calculation complies with the Bankruptcy Code because it meets the criteria for administrative priority under the Bankruptcy Code ...........................................................................................................15 1. The Reorganized Debtors received consideration supporting the Pension Fund’s right to an administrative claim of $7,219,172 ..............................................15 The Reorganized Debtors benefited from the consideration they received during the postpetition period ...............................................................................16

2.

C.

A&P’s method of calculating the Pension Fund’s administrative claim does not comply with ERISA and instead attempts to redefine A&P’s post-petition withdrawal liability obligation in a way that has no relationship to A&P’s actual withdrawal liability under ERISA .......................................................................................................18

CONCLUSION ..............................................................................................................................21 CERTIFICATE OF SERVICE ......................................................................................................22

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TABLE OF AUTHORITIES Cases  Artistic Carton, 971 F.2d at 1350 ................................................................................................. 15 Concrete Pipe & Prods. v. Constr. Laborers Pension Trust, 508 U.S. 602 (1993) .................................................................................................. 8, 9, 15 Connolly v. Pension Benefit Guar. Corp., 475 U.S. 211 (1986) ........................................ 7, 15, 24 Gastronomical Workers Union Local 610 & Metro. Hotel Ass’n Pension Fund v. Dorado Beach Hotel Corp., 617 F.3d 54 (1st Cir. 2010) .......................................................................... 10 Hughes Aircraft Co. v. Jacobson, 525 U.S. 432 (1999) ........................................................... 8, 24 In re Adelphia Bus. Sols., Inc., 296 B.R. 656 (Bankr. S.D.N.Y. 2003) .................................... 3, 18 In re Anything Elec. Contrs. Co., No. 96-10751, 2005 Bankr. LEXIS 3447 (Bankr. N.D.N.Y. Jan. 18, 2005) ...................................................................................... 14 In re Cott Corp., 47 B.R. 487 (Bankr. D. Conn. 1984) ......................................................... passim In re M & S Grading, Inc., No. 02-81632, 2009 Bankr. LEXIS 2021 (Bankr. D.Neb. July 27, 2009) .......................................................................................... 13 In re Marcal Paper Mills, Inc., 650 F.3d 311 (3d Cir. 2011) ................................................ passim In re NP Mining, 963 F2d 1449 (11th Cir. 1992) ......................................................................... 20 In re Old Carco LLC, 424 B.R. 650 (Bankr. S.D.N.Y. 2010) ...................................................... 19 In re Patient Educ. Media, 221 B.R. 97 (Bankr. S.D.N.Y. 1998) ................................................ 19 In re Pulaski, 57 B.R. 502 (Bankr. M.D. Tenn. 1986) ......................................................... 4, 6, 19 In re Refco, Inc., No. 07-4784, 2008 U.S. Dist. LEXIS 2484 (S.D.N.Y. Jan. 14, 2008)................................................................................................... 20 In re Sunarhauserman, 184 B.R. 279 (N.D. Ohio 1995) .................................................. 22, 23, 24 In re World Sales, 183 B.R. 872 (B.A.P. 9th Cir. 1995) .............................................................. 13 LTV Steel Co. v. Shalala (In re Chateaugay Corp.), 53 F.3d 478 (2d Cir. 1995)........................................................................................ 6, 7, 16 Morton v. Mancari, 417 U.S. 535 (1974) ....................................................................................... 6 Reading Co. v. Brown, 391 U.S. 471 (1968) ................................................................................ 20

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Riverwood Int’l Corp. v. Olin Corp. (In re Manville Forest Prods. Corp.), 225 B.R. 862 (Bankr. S.D.N.Y. 1998) ................................................................................ 7 Strobl v. New York Mercantile Exch., 768 F.2d 22 (2d Cir. 1985) ................................................. 6 Trs. of the Amal. Ins. Fund v. McFarlin’s, Inc. (In re McFarlin’s, Inc.), 789 F.2d 98 (2d Cir. 1986)......................................................................................... passim Statutes  11 U.S.C. § 101 ............................................................................................................................. 10 11 U.S.C. § 503 ...................................................................................................................... passim 29 U.S.C. § 1002 ..................................................................................................................... 10, 11 29 U.S.C. § 1082 .................................................................................................................... passim 29 U.S.C. § 1084 .................................................................................................................... passim 29 U.S.C. § 1391 ..................................................................................................................... 14, 18

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FOOD EMPLOYERS LABOR RELATIONS ASSOCIATION AND UNITED FOOD AND COMMERCIAL WORKERS PENSION FUND’S SUPPLEMENTAL BRIEF The Food Employers Labor Relations Association and United Food and Commercial Workers Pension Fund (the “Pension Fund” or “Fund”) provides this supplemental brief in connection with its motion for entry of an order allowing its administrative expense claim in the amount of $7,219,172 in the bankruptcy action of the Great Atlantic & Pacific Tea Company, Inc. (“A&P”) and its affiliates as reorganized debtors (the “Reorganized Debtors”). Preliminary Statement At the hearing on June 27, 2013, the parties will present to the Court competing methods for calculating the Pension Fund’s administrative claim for withdrawal liability. Withdrawal liability is a statutory mechanism under Employee Retirement Income Security Act of 1974 (“ERISA”), as amended by the Multiemployer Pension Plan Amendments Act of 1980 (“MPPAA”), for assessing a portion of unfunded liabilities to employers that withdraw from an underfunded multiemployer defined benefit plan. Upon A&P’s withdrawal from the Pension Fund on January 31, 2012, the Reorganized Debtors became obligated to pay withdrawal liability to the Pension Fund in the total amount of $77,420,079. A portion of this total withdrawal liability is attributable to the post-petition bankruptcy period, and thus the Pension Fund asks that the Court compel the Reorganized Debtors to pay the Pension Fund’s administrative claim for this post-petition withdrawal liability pursuant to the requirements of the Bankruptcy Code, 11 U.S.C. § 503(b)(1)(A). The Pension Fund is entitled to recover a portion of its withdrawal liability as an administrative expense. A number of courts have found that withdrawal liability can be apportioned between the pre- and post-petition liabilities, and the post-petition portion should be granted administrative priority. While few courts have addressed how to calculate an 1

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administrative claim for withdrawal liability, it is clear that the calculation method the Court adopts must give effect to both of the comprehensive statutory schemes implicated by the Pension Fund’s administrative claim – the Bankruptcy Code and ERISA. Each of the parties advocates a starkly different method of calculating the Fund’s administrative claim. The Pension Fund, which seeks administrative expense priority for $7,219,172 of its $77 million claim for withdrawal liability against the Reorganized Debtors (the balance of which is general unsecured), bases its calculation upon the Bankruptcy Code, ERISA and its own Withdrawal Liability Rules. The effect of the Pension Fund’s calculation is to prorate the portion of A&P’s withdrawal liability that was incurred post-petition (20 days in 2010 and all of 2011), yielding an administrative claim of $7.2 million. By contrast, the Reorganized Debtors advocate an administrative claim calculation method that has no relationship to the calculation of its withdrawal liability obligation to the Fund under ERISA. The Reorganized Debtors argue that the Pension Fund’s administrative claim should be the difference between the post-petition pension benefits accrued by A&P employees, and the post-petition contributions A&P made to the Fund on the employees’ behalf. However, based on the unique characteristics of defined benefit multiemployer pension funds, explained in detail below, this method absurdly results in an administrative claim that is a negative number. Because only the Pension Fund’s administrative claim calculation gives effect both to the Bankruptcy Code’s provision for administrative claims and ERISA’s rules regarding withdrawal liability, whereas the Reorganized Debtors’ method completely disregards both, the Court must apply the Pension Fund’s method and allow its administrative claim for $7.2 million.

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Discussion I. The Pension Fund is entitled to recover the post-petition portion of A&P’s withdrawal liability as an administrative claim. The Pension Fund is entitled to claim the post-petition portion of A&P’s withdrawal liability as an administrative expense under 11 U.S.C. § 503(b)(1)(A). As the party claiming an administrative expense, the Pension Fund bears the burden of proving the claim qualifies for administrative priority under the Bankruptcy Code. In re Adelphia Bus. Sols., Inc., 296 B.R. 656, 662 (Bankr. S.D.N.Y. 2003). The payment of withdrawal liability is a statutorily imposed cost of providing benefits by an employer participating in a multiemployer defined benefit pension plan under a collective bargaining agreement. Of the few cases that have addressed this issue, the weight of authority favors allowing administrative priority for the post-petition portion of a debtor’s withdrawal liability. See In re Marcal Paper Mills, Inc., 650 F.3d 311, 320 (3d Cir. 2011) (granting administrative priority for post-petition portion of withdrawal liability); In re Pulaski, 57 B.R. 502, 509 (Bankr. M.D. Tenn. 1986) (same); In re Cott Corp., 47 B.R. 487, 491-92 (Bankr. D. Conn. 1984) (same). In the only Second Circuit decision to address this issue, the Court declined to allow an administrative expense claim, but recognized the possibility that an administrative claim for post-petition withdrawal liability would be allowable under different facts. Trs. of the Amal. Ins. Fund v. McFarlin’s, Inc. (In re McFarlin’s, Inc.), 789 F.2d 98, 103-04 (2d Cir. 1986). In McFarlin’s, the employer’s withdrawal date and its bankruptcy petition date both occurred during the same plan year. Id. at 103. Because an employer’s withdrawal liability is calculated as of the last day of the plan year ending before its withdrawal date, the employees’ post-petition work was not part of the employer’s withdrawal liability obligation to that pension fund. Id. 3

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Therefore, the Court found that the employer’s post-petition participation in the fund did not take place for the benefit of the estate’s creditors. Id. at 103-04. Here, by contrast, A&P’s employees continued to work, and thus A&P continued to participate in the Pension Fund, for one year and 20 days after A&P filed its bankruptcy petition, and then A&P withdrew during the second Plan Year (here, a calendar year) following its bankruptcy petition date. Therefore, unlike in McFarlin’s, the post-petition work of A&P’s employees impacted the calculation of A&P’s withdrawal liability obligation to the Fund. Put more precisely, in exchange for receiving the post-petition services of A&P’s employees, the Reorganized Debtors continued to participate in the Pension Fund, and thus knowingly incurred the additional withdrawal liability costs that were inherent in continuing to participate in the Pension Fund for 385 post-petition days. (See Declaration of Kevin Woodrich, Doc. No. 4094 (“Woodrich Decl.”) ¶ 14; Deposition of Kevin Woodrich (“Woodrich Dep.”) 79:15-81:22, 144:9-145:9.) Accordingly, even under the McFarlin’s holding, because A&P employed employees during the Plan Year following the Plan Year in which it filed for bankruptcy, A&P owes withdrawal liability for the post-petition period as an administrative expense. The Third Circuit, in In re Marcal Paper Mills, Inc., recently affirmed the district court’s granting of administrative priority for the post-petition portion of a debtor’s withdrawal liability. 650 F.3d at 320. In reaching its conclusion, the Court observed that conferring administrative priority on the post-petition portion of the employer’s withdrawal liability enables the statutory schemes of ERISA and the Bankruptcy Code to coexist: “In holding that withdrawal liability can be apportioned between pre- and post-petition time periods and that the post-petition portion can be classified as an administrative expense, we harmonize the purposes of the Bankruptcy Code and ERISA, as amended by the MPPAA, as we are required to do.” Id. This same goal of harmonizing the two statutes likewise applies to the Pension Fund’s administrative claim. 4

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Finally, other courts also have recognized that withdrawal liability can and should be apportioned between pre- and post-petition time periods, to effectuate both bankruptcy law and ERISA. See, e.g., Pulaski, 57 B.R. at 508; Cott, 47 B.R. at 492. II. When calculating the portion of the Pension Fund’s withdrawal liability claim that is entitled to administrative expense priority, the Court must give effect to both ERISA and the Bankruptcy Code. The Pension Fund’s administrative claim for withdrawal liability implicates two comprehensive statutes, the Bankruptcy Code and ERISA, and the Court must give effect to both. “Statutes are to be construed together to effectuate, to the greatest extent possible, the legislative policies of both.” Strobl v. New York Mercantile Exch., 768 F.2d 22, 30 (2d Cir. 1985). “The courts are not at liberty to pick and choose among congressional enactments, and when two statutes are capable of co-existence, it is the duty of the courts, absent a clearly expressed congressional intention to the contrary, to regard each as effective.” Morton v. Mancari, 417 U.S. 535, 551 (1974). See also Marcal, 650 F.3d at 320; LTV Steel Co. v. Shalala (In re Chateaugay Corp.), 53 F.3d 478, 498 (2d Cir. 1995) (finding payments to employee benefit trust funds required by the Coal Industry Retiree Health Benefit Act of 1992 are taxes entitled to administrative priority). The Bankruptcy Code provides the framework for determining whether a “claim” to the bankruptcy estate, defined as a “right to payment,” 11 U.S.C. § 101(5)(A), is an “administrative expense,” 11 U.S.C. § 503(b)(1)(A). Chateaugay, 53 F.3d at 497. The existence of a right to payment is governed by non-bankruptcy law, while the timing of when the claim arose is governed by the Bankruptcy Code. Id.; Riverwood Int’l Corp. v. Olin Corp. (In re Manville Forest Prods. Corp.), 225 B.R. 862, 866 (Bankr. S.D.N.Y. 1998). ERISA, on the other hand, is a “comprehensive and reticulated statute” that includes withdrawal liability rules specifically designed to ensure that “employees and their beneficiaries would not be deprived of anticipated 5

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retirement benefits,” and to “discourage voluntary withdrawals and curtail . . . incentives to flee the plan.” Connolly v. Pension Benefit Guar. Corp., 475 U.S. 211, 214 & 217 (1986). These two statutes must be applied equally to determine the amount of the Pension Fund’s administrative claim. A. The calculation of the Pension Fund’s administrative claim must take into account the Pension Fund’s status as a “defined benefit” plan under ERISA.

The method of calculating the Pension Fund’s administrative claim for withdrawal liability must recognize the Pension Fund’s status as a multiemployer defined benefit plan under ERISA Sections 3(37) and (35), 29 U.S.C. § 1002(35), (37). However, the Reorganized

Debtors’ proposed method for calculating the Pension Fund’s administrative claim, which “compares only the benefits accrued by Debtors’ employees post-petition with Debtors’ postpetition contributions” (Amended Declaration of Darren French, Doc. No. 4119 (“French Decl.”) ¶ 6), completely disregards the structure and operation of a defined benefit plan. Unlike an “individual account plan” or “defined contribution plan” (such as a 401(k) plan), which provides each participant with “benefits based solely upon the amount contributed” to the participant’s individual account, ERISA Section 3(34); 29 U.S.C. § 1002(34), a multiemployer defined benefit plan creates a framework in which the contributions of all the participating employers are placed in a single pooled trust, for the benefit of all participants and beneficiaries of the plan. See ERISA Sections 302 and 304; 29 U.S.C. §§ 1082 and 1084; Concrete Pipe & Prods. v. Constr. Laborers Pension Trust, 508 U.S. 602, 605-07 (1993). See also ERISA Section 3(35); 29 U.S.C. § 1002, (35) (defining “defined benefit” plan); Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 439 (1999) (“[T]he employer typically bears the entire investment risk and . . . must cover any underfunding as the result of a shortfall that may occur

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from the plan’s investments.”). Therefore, employers participating in such a fund share the risks associated with pooling the pension fund’s assets. As the Supreme Court explained in a case involving withdrawal liability owed to a multiemployer defined benefit pension fund, “depending on the future employment of Concrete Pipe’s former employees, the withdrawal liability assessed against Concrete Pipe may amount to more (or less) than the share of the Plan’s liability strictly attributable to employment of covered workers at Concrete Pipe. But this possibility was exactly what Concrete Pipe accepted when it joined the Plan.” Concrete Pipe, 508 U.S. at 574-75. See also Marcal, 650 F.3d at 318 (“Although Marcal LLC paints the amount of withdrawal liability it owes as wholly subject to the whims of the market and actuarial assumptions, it ignores the fact that pursuant to Marcal’s agreement to provide a defined benefit, it assumed those risks with open eyes.”). Similarly, when A&P, though its Super Fresh affiliate, entered into a series of collective bargaining agreements with the United Food and Commercial Workers Union, Local 27 (“CBAs”), obligating it to contribute to the Pension Fund, and when A&P continued its participation in the Pension Fund under one or more such CBAs after its bankruptcy petition date, A&P was, as the Supreme Court put it, accepting that its pre-petition and post-petition withdrawal liability obligation might “amount to more (or less) than the share of the [Pension Fund’s] liability strictly attributable to employment of covered workers” at its Super Fresh stores. Concrete Pipe, 508 U.S. at 574-75. As such, the Court must calculate the Pension Fund’s administrative claim for post-petition withdrawal liability using a method that reflects this “shared liability” feature of a multiemployer defined benefit pension fund.

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B.

The calculation of the Pension Fund’s administrative claim must take into account the fact that, by its participation in a multiemployer defined benefit pension fund, A&P promised to help fund a portion of all the benefits payable under the Pension Fund, not just the benefits payable to its own employees.

In order for a multiemployer defined benefit pension plan such as the Pension Fund to comply with the minimum funding requirements established under Part 3 of ERISA, all of its contributing employers, in the aggregate, must contribute to the fund in an amount necessary to ensure that the fund does not have an accumulated funding deficiency. ERISA Section 302(a)(2)(C); 29 U.S.C. § 1082(a)(2)(C). An accumulated funding deficiency will occur if all of the charges to the multiemployer defined benefit pension plan’s pooled account exceed the credits to that account. ERISA Sections 304(a) and (b), 29 U.S.C. § 1084(a) and (b). Further, if a fund experiences an accumulated funding deficiency, all of its participating employers share the responsibility of making the additional contributions necessary to cure the deficiency, or risk the imposition of excise taxes on every participating employer. ERISA Section 302(a)-(c), 29 U.S.C. § 1082(a)-(c); Gastronomical Workers Union Local 610 & Metro. Hotel Ass’n Pension Fund v. Dorado Beach Hotel Corp., 617 F.3d 54, 58-60 (1st Cir. 2010). By statute, each of the Pension Fund’s participating employers is required to contribute to the Fund at a rate that is sufficient, when combined with the contribution rates of all the Fund’s other participating employers, to prevent the Fund from incurring a minimum funding deficiency and to pay the benefits of all vested participants and beneficiaries; not at a rate designed to cover the benefits earned by a single employer’s own employees. This is the cost to an employer of participating in a multiemployer defined benefit pension plan. It is within this statutory framework of shared liability that participating employers must contribute to the Pension Fund, and withdrawn employers must pay withdrawal liability to the Pension Fund. There is no precedent or justification for excusing the Reorganized Debtors from 8

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this statutorily mandated shared responsibility in the context of calculating an administrative claim for withdrawal liability. As recognized by the Second Circuit in McFarlin’s, when an employer participates in a defined benefit plan, the “plan, and, indirectly, each participating employer promise[s] to all participating employees (including those employed by others) benefits based on projections of future employer contributions.” McFarlin’s, 789 F.2d at 102. Thus, when A&P entered into each of the CBAs, it promised to help fund the pension benefits of all the Pension Fund’s participants and beneficiaries, not just its own. It makes perfect sense, therefore, that A&P’s withdrawal liability to the Pension Fund, as applicable to both the pre-petition period and the post-petition period, reflects its proportionate share of the entire Fund’s unfunded vested benefits that otherwise would “prevent the employer from fulfilling its promise to provide a specific retirement benefit, a promise which is made in exchange for the employees’ work.” Marcal, 650 F.3d at 318. 1. ERISA prohibits the Reorganized Debtors from defining the scope of A&P’s post-petition withdrawal liability obligation solely based on the post-petition benefit accruals of A&P’s own employees.

A&P’s expert, Darren French, openly admitted in his deposition testimony that no method of calculating withdrawal liability under ERISA permits a participating employer to only pay for the unfunded vested benefits of its own employees. (Deposition of Darren French (“French Dep.”) 25:8-20, 30:25-31:25, 34:2-17.) See ERISA Section 4211, 29 U.S.C. § 1391. This is because, as stated above, all employer contributions to a multiemployer defined benefit plan are pooled into a single trust for the benefit of all participants and dependents. The Reorganized Debtors’ suggestion that the Pension Fund’s administrative claim for withdrawal liability be calculated solely on the basis of the benefits accrued by A&P’s participating

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employees during the post-petition period directly conflicts with the very statute under which their withdrawal liability obligation arises. Further, withdrawal liability is not the only obligation under a multiemployer defined benefit pension plan to be calculated based on the liabilities of the plan as a whole. The contribution rates applicable to A&P under its CBAs also took into account the need for each participating employer to help pay for the Pension Fund’s past and future liabilities. See ERISA Sections 302(a)-(c), 29 U.S.C. § 1082(a)-(c). The Reorganized Debtors paid the Fund’s full administrative claim for delinquent contributions in January, 2012, without any argument that they only were obligated to pay in full that portion of the delinquent contributions directly attributable to the benefits accrued by A&P’s employees post-petition. In doing so, the Reorganized Debtors effectively agreed that the Fund had a valid administrative claim for contributions that encompassed the totality of A&P’s pooled funding obligations, not just a funding obligation relating to the work performed by its own employees during the post-petition period. Now, in the context of the Fund’s administrative claim for post-petition withdrawal liability, the Reorganized Debtors have changed their position without explanation. Instead, they are attempting to shirk their statutorily imposed duty to pay withdrawal liability, which is based on the pooled nature of the Pension Fund’s assets, by arguing that the Court should dissect A&P’s post-petition contribution obligation to the Fund to account for only a portion of the contributions that relates to how the Fund’s administrative claim for withdrawal liability is determined. There is no precedent for the Reorganized Debtors’ attempt to manipulate an administrative claim in such fashion. To the contrary, when assigning administrative priority to delinquent contribution claims, such as the Pension Fund’s claim described above, courts have established a different precedent by granting administrative priority to more than just the 10

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delinquent contributions accrued. Rather, such administrative claims also include the related interest, liquidated damages, and attorneys’ fees and costs mandated by ERISA 502(g)(2), 29 U.S.C. 1145(g)(2), even though these amounts are not directly attributable to the employees’ post-petition work and instead resulted from the employer’s failure to timely remit its contributions. See, e.g., In re World Sales, 183 B.R. 872, 878 (B.A.P. 9th Cir. 1995) (concluding that an ERISA benefit fund was entitled to recover post-petition delinquent contributions, interest, liquidated damages, and attorneys’ fees as administrative expenses); In re M & S Grading, Inc., No. 02-81632, 2009 Bankr. LEXIS 2021, at **10-11 (Bankr. D.Neb. July 27, 2009) (granting an ERISA health and welfare plan’s application for payment of delinquent contributions and reasonable attorneys’ fees as administrative expenses); In re Anything Elec. Contrs. Co., No. 96-10751, 2005 Bankr. LEXIS 3447, at *19 (Bankr. N.D.N.Y. Jan. 18, 2005) (holding that an ERISA health and welfare fund was entitled to recover, as administrative expenses, post-petition delinquent contributions, interest, liquidated damages, and attorneys’ fees pursuant to the collective bargaining agreement). Courts evaluating administrative claims for delinquent contributions have not been willing to dissect a participating employer’s statutorily imposed post-petition obligation to contribute to a defined benefit pension fund, thus enabling the employer to escape its duty to the fund’s participants and beneficiaries. Likewise, this Court cannot allow the Reorganized Debtors to evade the statutory commitments that A&P knowingly made to the Pension Fund and its participants and beneficiaries during the post-petition period. A&P made an informed decision to continue participating under the Fund for 385 post-petition days, and thus A&P must be compelled to fulfill its statutory obligations for that time period.

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2.

The Reorganized Debtors’ post-petition withdrawal liability obligation to the Pension Fund must be based on its proportionate share of the entire Pension Fund’s unfunded liabilities.

Just as a participating employer must pay contributions to a multiemployer defined benefit plan based on the pooled nature of the plan, a withdrawing employer must pay withdrawal liability when it leaves the plan based on the same concept. Withdrawal liability under ERISA is a necessary product of the pooled assets and liabilities structure of a multiemployer defined benefit pension plan, much like an “insurance scheme” in which a “rational employer hopes that its employees will vest at a rate above the average for all contributing employers … [b]ut the rational employer also appreciates the foreseeable risk that circumstances may produce the opposite result.” Concrete Pipe, 508 U.S. at 574-75. “Since the MPPAA spreads the unfunded vested liability among employers in approximately the same manner that the cost would have been spread if all of the employers participating at the time of withdrawal had seen the venture through, the withdrawal liability is consistent with the risks assumed on joining a plan (however inconsistent that liability may be with the employer’s hopes).” Id. at 575. Inherent in the concept of withdrawal liability is the element of fairness. Withdrawal liability “directly depends on the relationship between the employer and the plan to which it had made contributions.” Connolly, 475 U.S. at 225. If A&P historically paid a smaller share of the total contributions received by the Pension Fund, then it would owe a smaller share of the Pension Fund’s unfunded vested benefits. And if the Pension Fund was fully funded and thus had the assets it needed to pay all promised benefits to its vested participants and beneficiaries upon retirement, then A&P’s withdrawal liability would be $0. See Artistic Carton, 971 F.2d at 1350 (“When a plan is terminated, no employer pays anything extra so long as the fund has the assets

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to meet vested obligations.”). The law simply requires that A&P pay in full the post-petition portion of its share of the Pension Fund’s underfunding. When A&P intentionally decided to continue participating in the Pension Fund after its bankruptcy petition date, it understood that, in exchange for the continued service of its participating employees, the Reorganized Debtors would continue to assume the risks inherent in participating in a multiemployer pension benefit plan such as the Pension Fund – risks based not just on the Reorganized Debtors’ obligations to A&P’s own employees, but on their obligations to all participants and beneficiaries under the Fund. The Reorganized Debtors knew that A&P’s continued participation in the Pension Fund required that it continue to pay contributions based on the pooled nature of the Pension Fund and could materially impact their post-petition liability to the Pension Fund. But they choose to participate anyway. They cannot now reap the benefits of A&P’s post-petition participation in the Pension Fund without paying the cost of such participation. As the Second Circuit noted in In re Chateaugay Corp., “an entity that benefited directly from the effect of [a] promise on the availability and quality of [union] labor . . . cannot now maintain that Congress acted arbitrarily in assigning to [it] a proportional share of the future cost of fulfilling that promise.” 53 F.3d at 491. III. The $7,219,172 post-petition portion of the Pension Fund’s withdrawal liability claim is entitled to priority as an administrative expense. A. The Pension Fund’s administrative claim calculation complies with ERISA because it apportions A&P’s total withdrawal liability obligation between the pre- and post-petition time periods.

The Pension Fund’s administrative claim calculation method, which is described in the Declaration of Kevin Woodrich and summarized below, is based on the amount of A&P’s total withdrawal liability to the Pension Fund attributable to the “post-petition calculation period.” (For purposes of the Reorganized Debtors’ withdrawal liability obligation to the Fund, the “post13

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petition calculation period” is December 12, 2010 through December 31, 2011, the period beginning with the Reorganized Debtors’ bankruptcy petition date and ending with the last day of the Pension Fund Plan Year before A&P’s withdrawal from the Pension Fund.) This method is supported by In re Cott Corp., a case in which the court found that it was “only sensible” to allow administrative priority for the portion of pension fund’s total claim for withdrawal liability, as calculated according to ERISA, that was incurred during the post-petition time period. 47 B.R. 487, at 494-95 (Bankr. D. Conn. 1984). (Woodrich Dep. at 19:24-21:3.) The Pension Fund calculated A&P’s total withdrawal liability obligation to the Fund using the “presumptive” method set forth in ERISA Section 4211(b)(1), 29 U.S.C. § 1391(b)(1) (“Section 4211”), which is the method that has been adopted by the Pension Fund’s Trustees and is reflected in the Pension Fund’s written Withdrawal Liability Rules. Under the “presumptive” method, A&P’s withdrawal liability is based on its allocated portion of the change in the Pension Fund’s unfunded vested benefits for each of the 20 Plan Years (“annual pools”) prior to the year of withdrawal, and each annual pool is based on a 10-year contribution history. Using this method, A&P’s total withdrawal liability obligation to the Pension Fund is $77,420,079. (Woodrich Decl. ¶¶ 10-14.) The administrative portion of the Reorganized Debtors’ total withdrawal liability obligation must be based on A&P’s share of the unfunded vested benefits attributable to the postpetition calculation period. Applying the “presumptive” method to the post-petition calculation period, A&P’s allocated share of the 2010 annual pool, pro-rated for 20 post-petition days in 2010, is $204,158, and A&P’s allocated share of the 2011 annual pool, all of which was postpetition, is $7,015,014. (Woodrich Decl. ¶ 14.) Therefore, the administrative expense portion of the Reorganized Debtors’ total withdrawal liability obligation is $7,219,172. (Woodrich Decl. ¶ 14.) 14

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B.

The Pension Fund’s administrative claim calculation complies with the Bankruptcy Code because it meets the criteria for administrative priority under the Bankruptcy Code.

An “administrative expense” is defined in the Bankruptcy Code as the “actual, necessary costs and expenses of preserving the estate,” including wages, salaries, and commissions for services rendered after the commencement of the bankruptcy case. See 11 U.S.C. § 503(b)(1)(A). By applying administrative priority to expenses incurred post-petition, the Bankruptcy Code advances its goal of rehabilitating the debtor by “encouraging third parties to supply goods and services on credit to the estate” and “providing fair treatment to those who provide goods or services, on a post-petition basis.” Adelphia Bus. Sols., 296 B.R. at 663-64. In the Second Circuit, an administrative claim must “arise[] out of a transaction” between the creditor and the debtor-in-possession, but “only to the extent that the consideration supporting the claimant’s right to payment was both supplied to and beneficial to the debtor-inpossession in the operation of the business.” McFarlin’s, 789 F.2d at 101. The Pension Fund’s administrative claim reflects the actual, necessary costs of preserving the Reorganized Debtors’ estate, and the consideration in support of its claim was beneficial to the Reorganized Debtors because the post-petition services provided by A&P’s employees pursuant to the CBAs, in exchange for A&P’s continued participation in the Pension Fund, enabled A&P to continue operations at the stores where those employees worked and thereby generate revenue to assist in financing its reorganization. 1. The Reorganized Debtors received consideration supporting the Pension Fund’s right to an administrative claim of $7,219,172.

“Consideration exists generally where (1) the debtor-in-possession induces the creditor to perform postpetition, or (2) the creditor performs under an executory contract prior to rejection.” In re Patient Educ. Media, 221 B.R. 97, 101 (Bankr. S.D.N.Y. 1998) (emphasis added). A 15

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debtor “induces” a creditor to perform when it “elects to continue to receive benefits from the other party to an executory contract pending a decision to assume or reject the contract….” In re Old Carco LLC, 424 B.R. 650, 656-57 (Bankr. S.D.N.Y. 2010). Here, both prongs of the test have been satisfied. Under the first prong, A&P induced its participating employees to continue their employment with A&P and induced the Pension Fund to continue its coverage of these participating employees post-petition by continuing to operate the stores that employed the participating employees and by continuing to pay contributions to the Pension Fund under the CBA, until its withdrawal from the Fund. Under the second prong, A&P received the benefit of its employees continued performance of their job duties during the post-petition period. As the Third Circuit has stated, “[b]ecause withdrawal liability ensures that there are enough plan assets to provide promised benefits, it is provided in consideration for the employees’ willingness to continue to work.” Marcal, 650 F.3d at 319. Further, “[i]f employees work post-petition, contractual and statutory rights like withdrawal liability are properly characterized as post-petition obligations to the extent they accrue after a bankruptcy filing.” Pulaski, 57 B.R. at 508 n.11. The Pension Fund clearly satisfies the Bankruptcy Code’s requirement that the Reorganized Debtors received consideration in exchange for the administrative withdrawal liability claim they incurred. 2. The Reorganized Debtors benefited from the consideration they received during the post-petition period.

In the context of establishing an administrative claim, the “benefit” analysis focuses on whether an expense was “necessary” to preserve the estate. In re Refco, Inc., No. 07-4784, 2008 U.S. Dist. LEXIS 2484, at *23 n.11 (S.D.N.Y. Jan. 14, 2008). The terms “actual” and 16

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“necessary” are not defined in 11 U.S.C. § 503(b), but, in the course of deciding cases under the Bankruptcy Code, courts have provided guidance as their meaning. See Reading Co. v. Brown, 391 U.S. 471, 476-77 (1968). “[T]here are other policies also involved in section 503(b)” that have implications broader than strictly rehabilitating the business or preserving the estate’s assets. In re NP Mining, 963 F2d 1449, 1454 (11th Cir. 1992) (citing Reading, 391 U.S. at 48485). “[C]osts that form an integral and essential element of the continuation of the business are necessary expenses even though priority is not necessary to the continuation of the business.” Reading, 391 U.S. at 484 (referring to taxes as an example). Withdrawal liability is one such cost. Applying this framework, A&P clearly benefited from the post-petition services provided by its employees under the CBAs because the employees’ services allowed A&P to continue operating certain stores during the post-petition period, thus increasing A&P’s revenue. By virtue of A&P’s deliberate decision to continue operating these stores during the post-petition period, even though it closed a significant number of other stores, it is clear that A&P viewed the continued operation of these stores, and the related costs, as an “integral and essential element” of its continuing business. Id. A&P’s employees, in turn, provided this continuing service based on the understanding that A&P would uphold its obligation to help ensure that the Pension Fund’s participants and beneficiaries would receive a pension benefit upon retirement. Allowing the Pension Fund’s administrative claim for the post-petition portion of the Reorganized Debtors’ withdrawal liability obligation, as determined under the withdrawal liability calculation method established by ERISA and adopted by the Pension Fund’s Board of Trustees, also comports with the Bankruptcy Code’s goal of enabling A&P to emerge from bankruptcy as a reorganized entity: The post-petition work of the employees supplied A&P with continuing revenue from the still operating stores. 17

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On the other hand, A&P’s administrative claim calculation method, as described below, would discourage third parties from doing business with a debtor-in-possession because the debtor would be able to receive valuable consideration from a creditor without the obligation to fully compensate the creditor for providing the services. C. A&P’s method of calculating the Pension Fund’s administrative claim does not comply with ERISA and instead attempts to redefine A&P’s post-petition withdrawal liability obligation in a way that has no relationship to A&P’s actual withdrawal liability under ERISA.

The Reorganized Debtors’ method for calculating the Pension Fund’s administrative expense claim, as described in the Amended Declaration of its expert witness, is simply to subtract the contributions A&P paid the Pension Fund for the post-petition period from the pension benefits its employees accrued under the Pension Fund during the same period. (French Decl. ¶ 6.) In support of their calculation, the Reorganized Debtors rely on a single federal district court case from Ohio, In re Sunarhauserman, 184 B.R. 279 (N.D. Ohio 1995), and an expert witness who describes, but is not testifying in favor of, their calculation method. (French Decl. ¶ 5.) In fact, the Reorganized Debtors’ expert admitted during his deposition that he had never used, nor even heard of, the calculation method in Sunarhauserman before the Reorganized Debtors’ bankruptcy counsel described it to him for the purpose of preparing his Declaration (French Dep. 49:21-50:24). He also stated that, on the two or three occasions during which he previously calculated an administrative claim for withdrawal liability, he used one of the alternative calculation methods described in his Declaration (French Decl. ¶¶ 18-20; French Dep. 17:5-25). And those two alternatives are both completely inconsistent with the calculation method the Reorganized Debtors urge the Court to apply here. Using the Reorganized Debtors’ calculation method, their expert determined that A&P’s pro-rated contributions during the post-petition portion of 2010 were estimated to be $130,701; 18

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its contributions during 2011, all of which was post-petition, were $1,815,940; and its contributions during the post-petition portion of 2012 were estimated to be $151,328, resulting in estimated total post-petition contributions of $2,097,969. (French Decl. ¶ 8-9.) He then estimated that the post-petition vested benefits accrued under the Pension Fund by A&P’s employees were worth $494,604. Applying these numbers to A&P’s calculation method, the $494,604 in benefits accrued post-petition, less A&P’s post-petition contributions of $2,097,969, yields –$1,603,365. Thus, while the Reorganized Debtors contend that the Pension Fund’s administrative claim should be $0 (French Decl. ¶¶ 7, 10), a literal application of their calculation method results in a negative number, indicating how silly a method it is. As evidenced by the absurd result of following the Reorganized Debtors’ calculation method through to its literal conclusion, this court-created method is in clear conflict with ERISA. In Sunarhauserman, the court determined, sua sponte, that it “must limit the

administrative priority component” of the pension fund’s claims to amounts that bear a “direct relation” to the debtor’s “post-petition operations.” Id. at 282. Therefore, the court’s calculation of the fund’s administrative claim for withdrawal liability consisted solely of the benefits earned by the debtor’s employees during the actual time period of post-petition operations, less the contributions paid for hours worked during the same time period; it did not include other factors that caused underfunding, such as an unexpected decrease in contributions during the plan year before the debtor withdrew. Id. at 282-83. This case was wrongly decided for multiple reasons. First, under the Sunarhauserman method, the Reorganized Debtors would be responsible for paying post-petition withdrawal liability to the Pension Fund only to the extent that such liability directly relates to the unfunded vested benefits earned by A&P’s employees during the post-petition period. As the Reorganized Debtors’ own expert testified, none of ERISA’s approved methods for calculating withdrawal liability, including the method adopted by the 19

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Pension Fund, permit a withdrawn employer to pay withdrawal liability based solely on the unfunded vested benefits attributable to its own employees. (French Dep. 25:8-20, 30:25-31, 34:2-17). Specifically, their expert agreed that “having liability only for an employer’s own employees on unfunded vested benefits . . . is certainly inconsistent with the withdrawal liability computation adopted and utilized by [the Pension Fund].” (French Dep. 54:14-21.) Second, the Sunarhauserman calculation method advocated by the Reorganized Debtors effectively requires the Pension Fund to dedicate the Reorganized Debtors’ post-petition contributions solely to the payment of benefits accrued by A&P’s employees during the postpetition time period. However, under a multiemployer defined benefit plan such as the Pension Fund, the contributions of all participating employers are combined for the purpose of paying the vested benefits of all participants and beneficiaries under the Fund. Hughes, 525 U.S. at 439-40. See also ERISA Sections 302 and 304, 29 U.S.C. §§ 1082 and 1084. Notably, the Reorganized Debtors’ own expert agrees with the Pension Fund on this point, acknowledging during his deposition that ERISA does not allow either an employer or a fund to “earmark” the employer’s contributions to the fund for a specific purpose or time period. (French Dep. 57:15-58:8.) Third, the Sunarhauserman calculation method requires that a withdrawn employer’s previously made contributions to a multiemployer defined benefit pension fund be subtracted from the withdrawal liability the employer otherwise owes, to determine the amount the employer actually must pay to the fund. In other words, there is absolutely no support under ERISA for the proposition that, after the Pension Fund has calculated A&P’s withdrawal liability obligation, it must then subtract from that obligation the contributions A&P previously made to the Fund during the post-petition period. The reason for this lack of authority is clear, as such a process is antithetical to the concept of withdrawal liability, which is designed to make up for the

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funding shortfall that exists after taking into account the contributions that employers already have paid into the Fund. Connolly, 475 U.S. at 216. Finally, if Sunarhauserman is correct, presumably its reasoning would not only apply to withdrawal liability, but also to post-petition contributions made to a multiemployer plan. But there is no precedent for an employer making contributions to a defined benefit multiemployer plan solely to fund its own employees’ post-petition benefits. This would be inconsistent with the collectively bargained contribution rate, and the funding rules under ERISA and the Internal Revenue Code, which require (as with withdrawal liability) that the funding obligations be calculated on a pooled basis. A plan could not accept contributions determined on a non-pooled basis. For the foregoing reasons, this Court must reject the Reorganized Debtors’ proposed method for calculating the Pension Fund’s administrative claim for withdrawal liability. Conclusion While the Pension Fund and A&P take markedly different approaches to calculating the Pension Fund’s administrative claim for withdrawal liability, only the Pension Fund’s approach is consistent both with the Bankruptcy Code and with ERISA. To give effect to both federal statutes implicated in this dispute, as it is required to do, the Court must choose the Pension Fund’s method for calculating its administrative expense claim. For the reasons described herein, the Pension Fund respectfully requests that the Court grant its Motion and order the Reorganized Debtors to pay to the Pension Fund an administrative claim of $7,219,172.

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Dated: June 13, 2013 Washington D.C. /s/ Barry S. Slevin SLEVIN & HART, P.C. 1625 Massachusetts Ave., NW, Suite 450 Washington, DC 20036 (202) 797-8700 Barry S. Slevin, Esq. Jeffrey S. Swyers, Esq. Laura Offenbacher Aradi, Esq. Dated: June 13, 2013 New York, New York

/s/ Julie D. Dyas HALPERIN BATTAGLIA RAICHT, LLP 555 Madison Avenue, 9th Floor New York, NY 10022 (212) 765-9100 Alan D. Halperin, Esq. Donna H. Lieberman, Esq. Julie D. Dyas, Esq. Counsel to the Food Employers Labor Relations Association and United Food and Commercial Workers Pension Fund

CERTIFICATE OF SERVICE I certify that on this 13th day of June, 2013, I served the foregoing on counsel of record via email as set forth below: Michael B. Slade, Esq. Kristina Alexander, Esq. Kirkland & Ellis LLP 300 North LaSalle Chicago, IL 60654 michael.slade@kirkland.com kristina.alexander@kirkland.com Counsel to Reorganized Debtors /s/ Julie D. Dyas Julie D. Dyas
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