Central States Areas v. Basic American Indus

In the
United States Court of Appeals
For the Seventh Circuit
No. 00-3920
Central States, Southeast and Southwest
Areas Pension Fund, et al.,
Plaintiffs-Appellants,
v.
Basic American Industries, Inc., et al.,
Defendants-Appellees.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 96 C 4736--Blanche M. Manning, Judge.
Argued May 8, 2001--Decided June 5, 2001
Before Bauer, Posner, and Coffey, Circuit
Judges.
Posner, Circuit Judge. The Multiemployer
Pension Plan Amendments Act, 29 U.S.C.
sec.sec. 1301 et seq., requires an
employer that withdraws from a plan which
is not overfunded to pay a "withdrawal
liability" calculated to avoid shifting
the cost of that employer’s pension
obligations to the other employers. E.g.,
Milwaukee Brewery Workers’ Pension Plan
v. Jos. Schlitz Brewing Co., 513 U.S.
414, 416-17 (1995); Central States,
Southeast & Southwest Areas Pension Fund
v. Hunt Truck Lines, Inc., 204 F.3d 736,
739 (7th Cir. 2000); Central States,
Southeast & Southwest Areas Pension Fund
v. Creative Development Co., 232 F.3d
406, 408-09 (5th Cir. 2000). The district
court dismissed this suit by the Central
States multiemployer pension plan for
payment of withdrawal liability as barred
by the Act’s six-year statute of
limitations. 29 U.S.C. sec. 1451(f). A
brief chronology will aid in focusing the
issue.
On June 22, 1989, a trio of affiliated
corporations (collectively "Allied
Grocers"), employers that were members of
the Central States plan, declared
bankruptcy under Chapter 11 of the
Bankruptcy Code. According to Central
States, the declaration of bankruptcy
entitled it, under the terms of the
multiemployer plan, to declare that
Allied was in default of its withdrawal
liability obligations, though it had not
yet actually withdrawn from the plan. The
statute defines "default," so far as
bears on this case, as "any . . . event
defined in rules adopted by the plan
which indicates a substantial likelihood
that an employer will be unable to pay
its withdrawal liability." 29 U.S.C. sec.
1399(c)(5)(B). Central States’ plan makes
an employer’s declaration of bankruptcy a
default. And under the statute a default
entitles a plan to "require immediate
payment of the outstanding amount of an
employer’s withdrawal liability." sec.
1399(c)(5); Board of Trustees v. Kahle
Engineering Corp., 43 F.3d 852, 854 (3d
Cir. 1994).
On May 18 of the following year, with
the Allied bankruptcy still pending,
Central States filed a proof of claim in
the bankruptcy proceeding, claiming that
Allied owed it a withdrawal liability
obligation of some $752,000 and setting
forth an installment schedule on which it
wanted to be paid. Two weeks later, on
June 2, Allied ceased operations, a move
that effected, as a matter of law, its
complete withdrawal from the plan. sec.
1383(a)(2); Bay Area Laundry & Dry
Cleaning Pension Trust Fund v. Ferbar
Corp. of California, Inc., 522 U.S. 192,
196 (1997); Central States, Southeast &
Southwest Areas Pension Fund v. Sherwin-
Williams Co., 71 F.3d 1338, 1341-42 (7th
Cir. 1995). Two weeks after that, on June
18, 1990, the plan sent Allied a notice,
and demand for payment, of withdrawal
liability in the exact amount of the
proof of claim in the bankruptcy
proceeding, to be paid in 14 equal
monthly installments, the first due on
August 1--just as requested in the proof
of claim. The record is silent on whether
the automatic stay was lifted to permit
Central States to make a demand outside
of bankruptcy; later we’ll see that it is
uncertain whether the stay must be lifted
to permit such a demand.
On December 27, 1995, Central States and
Allied settled the dispute over Allied’s
withdrawal liability, agreeing that it
was $526,000, which became a nonpriority
unsecured claim in the bankruptcy. The
record is silent on whether any part of
the claim was ever paid or whether Allied
emerged from its Chapter 11 bankruptcy as
an operating company.
Central States brought this suit on July
31, 1996, not against Allied but against
Basic American Industries, Inc. and other
companies under common control with
Allied and therefore jointly and
severally liable for Allied’s withdrawal
obligation. 29 U.S.C. sec. 1301(b)(1).
Some defendants were added later by an
amended complaint and there is an issue
whether the original defendants were
served with process in a timely fashion,
but we can avoid these matters and
confine our attention to the statute of
limitations issue. The suit seeks the
same amount as the proof of claim filed
in the Allied bankruptcy proceeding and
the demand for payment from Allied made
by Central States in June of 1990. (There
is no suggestion, as yet anyway, that the
settlement with Allied capped Central
States’ claim against the affiliates.)
The suit was filed more than six years
after the proof of claim, the complete
withdrawal by Allied from the plan, and
the demand for payment, although less
than six years after the first and all
subsequent installment payments of
Allied’s withdrawal liability were due.
Central States argues that the statute of
limitations did not begin to run for the
first of the installments until Allied
failed to pay it on August 1, 1990, and
for the later installments until their
due dates passed without payment.
Central States fastens on the Supreme
Court’s statement in Bay Area Laundry &
Dry Cleaning Pension Trust Fund v. Ferbar
Corp. of California, Inc., supra, 522
U.S. at 195, that the MPPAA’s six-year
statute of limitations does not begin to
run "until the employer fails to make a
payment on the schedule set by the fund,"
and, as a backup, on the further
statement in that opinion that "each
missed payment [of an MPPAA installment
obligation] creates a separate cause of
action with its own six-year limitations
period." Id. The first statement, as the
Court’s opinion makes clear, is limited
by its context, which did not include
bankruptcy. The employer in Bay Area
ceased operations and withdrew from the
plan, whereupon the plan computed the
employer’s withdrawal liability and
demanded payment of it in installments on
specified dates. The plan’s cause of
action accrued, the Supreme Court held,
when the employer failed to make the
first payment on time. The plan could not
have sued earlier because until then the
employer had not defaulted on its
withdrawal obligation. And since the plan
did not invoke the default as a basis for
accelerating the due dates of the
subsequent installments, those
installments were not defaulted until
their due dates arrived and the employer
again failed to pay. In so holding, the
Court expressly rejected (id. at 206,
209-10) the contrary view that we had
expressed in Central States, Southeast &
Southwest Areas Pension Fund v. Navco, 3
F.3d 167, 171-72 (7th Cir. 1993).
The Court did not suggest and it would
have been contrary to the thrust of its
opinion, which (again rejecting our
position in Navco, see 522 U.S. at 208-
09) was to assimilate statute of
limitations issues under the
Multiemployer Pension Plan Amendments Act
to the legal principles generally
applicable to statutes of limitations
issues, id. at 195, 208, 210, to suggest
that the only way in which the payor in
a contract can default is by failing to
pay when payment becomes due. One way is
by repudiating the obligation to pay;
anticipatory repudiation is a breach of
contract that entitles the payee to sue
without waiting for the date when payment
was due to come and go. E.g., Roehm v.
Horst, 178 U.S. 1, 18-19 (1900);
Wisconsin Power & Light Co. v. Century
Indemnification Co., 130 F.3d 787, 793
(7th Cir. 1997); Nashville Lodging Co. v.
Resolution Trust Corp., 59 F.3d 236, 245
(D.C. Cir. 1995); E. Allan Farnsworth,
Contracts sec.sec. 8.20-.23 (3d ed.
1999). There is an exception: if the
payee has completely performed his side
of the contract and is just awaiting
payment, he can’t declare a breach and
sue for immediate payment just because he
has reason (even compelling reason) to
doubt that the other party will pay when
due. E.g., Roehm v. Horst, supra, 178
U.S. at 17-18; Restatement (Second) of
Contracts sec. 243(3) (1981); Farnsworth,
supra, sec. 8.20, pp. 602-03 (3d ed.
1999). The idea behind this dubious rule
seems to be that, having performed, the
payee can no longer protect himself
against nonpayment by suspending
performance. In other words, anticipatory
repudiation (sometimes called
anticipatory breach) is conceived of
primarily as a trigger of a contract
party’s right of self-help, like the
breach of a condition in a contract. See
C.L. Maddox, Inc. v. Coalfield Services,
Inc., 51 F.3d 76, 81 (7th Cir. 1995);
First National Bank v. Continental
Illinois National Bank & Trust Co., 933
F.2d 466, 469 (7th Cir. 1991); American
Hospital Supply Corp. v. Hospital
Products Ltd., 780 F.2d 589, 599 (7th
Cir. 1986); Farnsworth, supra, sec. 8.20,
p. 600.
Why the doctrine of anticipatory
repudiation should be so limited eludes
our understanding. Announcement by the
other party that he has no intention of
paying should entitle the prospective
victim of the payor’s breach to take
immediate steps to protect his interest,
as by suing. Against this it has been
argued that the doctrine of anticipatory
repudiation "will not intercede to rescue
the promisee from the consequences of the
absence of an acceleration clause."
Rosenfeld v. City Paper Co., 527 So. 2d
704, 706 (Ala. 1988); cf. First State
Bank v. Jubie, 86 F.3d 755, 760 (8th Cir.
1996). That gets it backwards.
Acceleration clauses are inserted to fill
a hole in the law of contracts, which has
failed here in its traditional and
important function of interpolating
rights and duties that the parties can be
expected to negotiate for, e.g., In re
Modern Dairy of Champaign, Inc., 171 F.3d
1106, 1108 (7th Cir. 1999), and thus of
economizing on the costs of transacting.
Acceleration clauses are a standard
contract provision for protecting the
payee against the consequences of a
breach by the other party; they would be
unnecessary were it not for the rule
carving out the completed-performance
case from the operation of the doctrine
of anticipatory repudiation. In any
event, the exception is inapplicable here
because the Central States plan continues
to be obligated to pay the pensions of
Allied’s former employees.
Our disapproved Navco case had involved,
in fact, both bankruptcy and repudiation;
but these features of the case had played
no role in our analysis (which was based
on an interpretation of the MPPAA) and
were neither involved nor mentioned in
Bay Area. There is nothing in the latter
decision to suggest that they are
immaterial. All Bay Area holds or
implies, at least so far as the present
case is concerned, is that withdrawal
from the plan is not an automatic default
of the obligations that such withdrawal
imposes and neither is missing one
installment payment of withdrawal
liability a default of the entire
withdrawal liability. There is nothing in
the opinion or its logic to suggest that
the principles of anticipatory
repudiation have no role to play under
the MPPAA, unless those principles were
stretched so far out of shape that, for
example, failure to make a single
installment payment were deemed
repudiation per se of the entire
obligation.
So we proceed to the question whether
there was in fact a repudiation here and
if so when it occurred. Filing for
bankruptcy, though by virtue of the
automatic stay it prevents the payee from
invoking the usual remedies for breach of
contract, 11 U.S.C. sec. 362; Buckley v.
Bass & Associates, No. 00-3054, slip op.
at 4 (7th Cir. May 7, 2001), and enables
the contract if still executory to be
rescinded by the trustee in bankruptcy
(or debtor in possession, if, as in this
case at the relevant time, there is no
trustee), sec. 365(a), is not
anticipatory repudiation per se. For the
trustee or debtor in possession can
affirm the contract even if it contains a
clause (a so-called "ipso facto" clause)
that makes filing for bankruptcy a ground
for termination. sec. 365(e)(B); Lyons
Savings & Loan Ass’n v. Westside
Bancorporation, Inc., 828 F.2d 387, 393
n. 6 (7th Cir. 1987); McAndrews v. Fleet
Bank of Massachusetts, N.A., 989 F.2d 13,
17 (1st Cir. 1993). Affirmance is the
opposite of repudiation, and the
affirmance option thus makes it
impossible to consider the declaration of
bankruptcy itself, whether or not there
is an ipso facto clause, a repudiation of
a creditor’s claim.
If the trustee or debtor in possession
exercises the discretion that the Code
gives him to reject the contract, that of
course is repudiation. See Central Trust
Co. v. Chicago Auditorium Ass’n, 240 U.S.
581, 589-90 (1916). But Allied, when in
June 1989 it declared bankruptcy, didn’t
repudiate its withdrawal liability. It
was still making contributions to the
fund and there was a possibility that it
would regain its financial footing
(remember that it filed for
reorganization under Chapter 11, not
liquidation under Chapter 7). It might
never withdraw from the fund and even if
it did it might still be able to pay the
withdrawal liability. Indeed, it did not
yet have any withdrawal liability, for
that liability attaches only when the
employer "completely withdraws" from the
multiemployer plan, 29 U.S.C. sec.
1381(a), which occurs only when he either
"(1) permanently ceases to have an
obligation to contribute under the plan,
or (2) permanently ceases all covered
operations under the plan." sec. 1383(a);
see Corbett v. MacDonald Moving Services,
Inc., 124 F.3d 82, 84 (2d Cir. 1997);
PBGC Opinion Letter 87-1, 1987 WL 68403
(Jan. 23, 1987). Merely filing for the
protection of the bankruptcy court is not
a repudiation of obligations or a
cessation of operations. More broadly,
insolvency, with or without a declaration
of bankruptcy, does not equal
dissolution. An insolvent firm is not
necessarily out of business, and the
parties with which it has contracts
cannot automatically assume that the firm
will default, Farnsworth, supra, sec.
8.21, p. 608 n. 16 and sec. 8.23, p. 613;
Martin v. Maldonado, 572 P.2d 763, 770 n.
22 (Alaska 1977); Arizona Title Ins. &
Trust Co. v. O’Malley Lumber Co., 484
P.2d 639, 647 (Ariz. App. 1971);
Restatement (Second) of Contracts, supra,
sec. 252 comment a, although it can of
course be a very ominous signal,
entitling a creditor to demand security.
E.g., id.; Arizona Title Ins. & Trust Co.
v. O’Malley Lumber Co., supra, 484 P.2d
at 647; cf. UCC 2-609.
The plan in this case contains an ipso
facto clause. For it permits Central
States to treat a member’s declaration of
bankruptcy as a default upon the
occurrence of which "the outstanding
amount of the withdrawal liability shall
immediately become due and payable." The
defendants’ argument that the clause was
even more--was a Doomsday Bomb requiring
Central States, whether it wanted to or
no, to treat the declaration of
bankruptcy as a default--is contrary to
the plan’s terms, which are permissive
rather than mandatory, cf. Greenhouse
Patio Apartments v. Aetna Life Ins. Co.,
868 F.2d 153, 155-56 (5th Cir. 1989), and
is bad policy as well, for reasons stated
in Board of Trustees v. Kahle Engineering
Corp., supra, 43 F.3d at 859 and n. 7.
(Briefly, declaring a default may, by
increasing the bankrupt’s obligations,
make it more difficult for the bankrupt
to regain its financial footing and pay
off the claims against it.) But even read
permissively, the default clause in the
Central States plan is an ipso facto
clause; and it is highly doubtful in
light of the cases and considerations
marshaled above that the MPPAA authorizes
such clauses.
So by filing a proof of claim for the
entire withdrawal liability that Allied
would owe if it withdrew (remember that
the declaration of bankruptcy was not
itself a withdrawal), Central States was
jumping the gun. No withdrawal liability
had yet arisen or could be precipitated
by the bankruptcy (because ipso facto
clauses are unenforceable). Neither in
June 1989 when Allied filed for
bankruptcy, nor May 18 of the following
year when Central States filed its proof
of claim, had a cause of action for
withdrawal liability arisen. The statute
of limitations therefore did not begin to
run on either date.
But it did begin to run--still more than
six years before Central States sued--no
later than June 18, 1990, when, Allied
having ceased operations on June 2,
Central States served on Allied a formal
demand for payment of the withdrawal
liability set forth in the proof of claim
that it had filed in the bankruptcy
proceeding. Complete cessation of
operations precipitates, as we have seen,
the employer’s (and any affiliates’)
withdrawal liability. That was the
default, and the demand determined its
amount (before that determination, a suit
would have been premature). It is true
that Central States could not insist on
immediate payment until the employer had
a chance to invoke its right to arbitrate
the amount of its withdrawal liability.
29 U.S.C. sec. 1401; Chicago Truck
Drivers, Helpers & Warehouse Union
(Independent) Pension Fund v. Century
Motor Freight, Inc., 125 F.3d 526, 533
(7th Cir. 1997). Allied’s duty to pay
Central States would have been suspended
by virtue of this rule until December 25,
1990, but the cause of action did not
arise then--the right to arbitration
presupposes that the cause of action has
already arisen and has now to be
adjudicated.
As a detail, we note that although
"demanding" payment from a debtor in
bankruptcy other than in the bankruptcy
proceeding itself is normally a violation
of the automatic stay, the demand for
payment of withdrawal liability is
probably an exception to this principle.
Central States, Southeast & Southwest
Areas Pension Fund v. Slotky, 956 F.2d
1369, 1372, 1375-76 (7th Cir. 1992). As a
further detail, we note that it is
arguable that the statute of limitations
actually began to run earlier than June
18, on June 2, since Central States had
already computed the withdrawal liability
and sent notice of the amount, via the
proof of claim, to Allied, substantially
complying with the statutory requirement
for notice of and demand for withdrawal
liability. 29 U.S.C. sec. 1399(b)(1);
Central States, Southeast & Southwest
Areas Pension Fund v. Koder, 969 F.2d
451, 453 (7th Cir. 1992). But this we
need not decide, as the decision would
not affect the outcome of the case.
Surprisingly, Central States has failed
to make the strongest argument available
to it for the timeliness of the suit,
which is that the fact that it demanded
payment on the installment plan shows
that it didn’t think Allied had
defaulted. But the argument would not
have succeeded even if it had been made.
The statute required Central States to
formulate an installment plan. sec.
1399(b)(1); Bay Area Laundry & Dry
Cleaning Pension Trust Fund v. Ferbar
Corp. of California, Inc., 522 U.S. 192,
196 (1997). And the reason for the
requirement has nothing to do with
determining when a default has occurred.
The reason is that Congress conceived of
withdrawal liability as a substitute for
the annual payments that the employer
would have made to the multiemployer
pension fund had he not withdrawn.
Milwaukee Brewery Workers’ Pension Plan
v. Jos. Schlitz Brewing Co., supra, 513
U.S. at 418-19; H.R. Rep. No. 96-869,
96th Congress, 2d Sess., 1980
U.S.C.C.A.N. 2918. The Supreme Court made
clear in Bay Area that the statutory
requirement does not prevent the fund
from accelerating all future payments
upon default, 522 U.S. at 210, thus
making all the installments due at once.
See also Board of Trustees v. Kahle
Engineering Corp., supra, 43 F.3d at 857,
861.
So the only question is whether there
was a default. There was. When Allied
ceased operating, Central States knew it
would never see any of the scheduled
installment payments. It had an unsecured
claim, so Allied could not make any of
the installment payments without
violating the absolute priority rule of
11 U.S.C. sec. 1129(b). With fewer assets
than claims, Allied would certainly pay
the fund less than the full value of its
claim. The best the fund could hope for
was a partial settlement of the
withdrawal liability. It should therefore
have concluded on June 2, 1990, that
Allied had repudiated its withdrawal
liability. Put differently, on that day
it became clear that Allied had disabled
itself from paying the withdrawal
liability. The standard rule in contract
law is that the promisee is free to sue
for anticipatory repudiation as soon as
the promisor has disabled itself from
performing its contractual obligations.
See, e.g., Restatement (Second) of
Contracts, supra, sec. 250(b). All that
remained to complete the cause of action
was to determine the amount due, which
happened, at the very latest, on June 18,
more than six years before the suit was
brought.
Central States argues finally that even
if it could not, by reason of the statute
of limitations, sue to recover the
payment due on August 1, 1990, a suit or
suits for the subsequent installments was
not barred. But there is no relevant
difference among the installments. All
specified payments on dates within the
six-year limitations period; if as we
have just held a suit to collect the
first installment nevertheless was barred
by reason of acceleration, so were suits
to collect all the subsequent ones.
We are not such skeptics as to deny the
possibility of commercial miracles. Even
if it seemed certain on June 2, 1990,
that Allied would not be able to pay the
first installment of its withdrawal
liability due two months later, there was
always the chance that, say, 16 months
later, when the last installment was due,
Allied would have had a miraculous
recovery and could pay at least that
installment. For all we know, it has had
a miraculous recovery; the record is
silent on whether and in what condition
Allied emerged from bankruptcy. But all
that is irrelevant. For it is
unquestioned that if there was a default
on June 2 or 18, Central States was
entitled to accelerate the due date of
all the installments to the present; the
fourteenth installment became due
immediately. Anyway the doctrine of
anticipatory repudiation does not traffic
in the miraculous. A breach occurs when
it is reasonably certain that the other
party is not going to meet its
obligations under the contract in timely
fashion. At that point the potential
victim is freed from its own contractual
obligations and authorized to take all
reasonable self-protective measures,
including suing. It is not required to
twiddle its thumbs for 20 years (the
maximum installment period under the
MPAA, 29 U.S.C. sec. 1399(c)(1)(B),
though the period here was only 14
months), while its prospects of
recovering what it is owed ooze away. The
point at which Central States knew that
Allied was not going to meet its
obligations (and also knew how much those
obligations were) was reached no later
than June 18 and required Central States
to sue within six years of that date,
which it failed to do.
Affirmed.