United Food v. Almac's, Inc. ( 1996 )

United States Court of Appeals
For the First Circuit
No. 96-1010
UNITED FOOD AND COMMERCIAL WORKERS UNION,
LOCAL 328, AFL-CIO,
Plaintiff-Appellant,
v.
ALMAC'S INC., et al.,
Defendants-Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND
[Hon. Mary M. Lisi, U.S. District Judge]
Before
Lynch, Circuit Judge,
Coffin, Senior Circuit Judge,
and Cummings,* Circuit Judge.
Warren H. Pyle, with whom Angoff, Goldman, Manning, Pyle &
Wanger, P.C. was on brief, for appellant.
Joel D. Applebaum, with whom Pepper, Hamilton & Scheetz was on
brief, for appellee.
July 24, 1996
*Of the Seventh Circuit, sitting by designation.
LYNCH, Circuit Judge. This case raises an important
LYNCH, Circuit Judge.
issue at the intersection of federal bankruptcy law and
federal labor policy. Almac's, Inc., a New England grocery
store chain that employed over 3000 people petitioned in 1993
for reorganization under Chapter 11 of the Bankruptcy Code,
11 U.S.C. 1101 et seq. Over the objection of the union
representing the employees, the bankruptcy court in a series
of emergency interim orders allowed the debtor to reduce the
employees' wages by nine to fifteen percent for almost a
year. The employees claim to have lost over $9,630,000 in
wages, but these emergency interim modifications to the
collective bargaining agreement permitted the company to
survive and ultimately to reorganize into a successor
company. The union ultimately agreed to a new collective
bargaining agreement with the successor company. But it
sought the $9,630,000 lost in the interim in wages,
characterizing the interim modifications as a "partial
rejection" of an executory contract (the bargaining
agreement) within the meaning of 11 U.S.C. 365. We hold
that Congress did not intend for emergency interim
modifications ordered under 11 U.S.C. 1113(e) to be treated
as "rejections" of the collective bargaining agreement.
Accordingly, the union and its members are not entitled here
to their lost wages and we affirm.
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I
Local 328,United Food and CommercialWorkers Union, AFL-
CIO ("Local 328") and Almac's, Inc. ("Almacs") were parties
to a collective bargaining agreement covering the period June
7, 1993 to June 1, 1996 (the "Agreement"). The Agreement
delineated the wages, benefits, and other terms and
conditions of employment for approximately three thousand
Almacs employees in Rhode Island and Massachusetts. On
August 6, 1993, shortly after the Agreement went into effect,
Almacs petitioned for reorganization under Chapter 11 of the
Bankruptcy Code. In October 1993, after reducing the wages
and benefits of unrepresented employees, Almacs moved under
section 1113(e) to implement interim modifications to the
wages and benefits of employees covered by the Agreement.
The bankruptcy court found that "the requested
modifications [were] not only essential to the continued
operations of Almac's, but [were] vital to any hope of a
successful reorganization." It granted Almacs' request for
both a fifteen percent reduction in the wages of all
employees covered by the Agreement and a reduction in wages
and benefits for employees who had been downgraded to part-
time positions. This modification was effective through
December 31, 1993.
Almacs requested and received consecutive extensions
to the modification, although the court reduced the wage
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modification from fifteen percent to twelve percent and then
to nine percent of the wages originally in effect. The court
periodically granted modifications effective through
September 30, 1994. Throughout this time period, Local 328
and Almacs were involved in negotiations over the fate of the
Agreement. Almacs never filed an application under section
1113(b) to reject the Agreement.
Following each modification order, Local 328 and two
employees, as class representatives for the Almacs employees,
filed claims for the difference between the modified wage and
benefit rates and those provided under the Agreement. The
total amount ultimately claimed was "at least $9,630,000."
Although from the face of the claims it appears that they
were initially pressed as administrative expense claims,
Local 328 later agreed to assert them only as general
unsecured claims. Local 328 does not now purport to assert
an administrative claim.
Almacs objected to the claims of Local 328 and the
class representatives. After a hearing on October 21, 1994,
the bankruptcy court sustained Almacs' objections. Local 328
and the employee claimants appealed to the district court.1
1. After Local 328 filed the notice of appeal, a plan of
reorganization was ratified by the creditor groups and then
approved by the bankruptcy court on November 8, 1994. Under
the plan, Almacs' assets would be sold to a newly formed
company, New Almac's, Inc. ("New Almacs"). New Almacs would
continue to operate Almacs' business. Local 328 had entered
into a new collective bargaining agreement with New Almacs
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The district court affirmed, reasoning that the only basis
for recognizing a claim would require viewing the
modifications to the Agreement as amounting to a rejection
and hence a breach of an executory contract, but because
interim wage modifications under section 1113(e) are
"judicially sanctioned, no breach occurs, and, as a result,
no viable claim arises."2 Local 328 has appealed from that
decision.
II
The bankruptcy court's order is subject to independent
review here, and we accept all bankruptcy court findings of
fact unless "clearly erroneous" and review rulings of law de
novo. In re LaRoche, 969 F.2d 1299, 1301 (1st Cir. 1992).
Because there was no appeal from the bankruptcy court's
interim orders, we accept that court's findings of fact in
which took effect upon approval of the plan of
reorganization.
In connection with the approval of the plan of
reorganization, Local 328 and Almacs stipulated to the
rejection of the (original) Agreement by Almacs. In the
stipulation, Local 328 waived any claim for damages based on
this consensual rejection of the Agreement, but preserved the
issue raised in this appeal. No petition for rejection was
submitted to the court.
2. The district court also reasoned that Local 328's claim
could not be sustained because it would have to be paid
before a plan of reorganization could be approved under
section 1129(a)(9)(A), thus putting the employer into a
Catch-22 situation. Both parties agree that this is a
correct statement of the law only with respect to
administrative expense claims. Local 328 does not argue on
appeal that it has an administrative claim.
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support of those orders as final and deem there to be no
questions about whether those orders were issued in
conformance with the statute or about the duration of the
emergency conditions.
At the outset, it is important to note the precise
nature of Local 328's claim. Local 328 argues on appeal that
it has a general unsecured claim, based on the
characterization of the interim modifications as "partial
rejections" of the Agreement. Local 328 does not assert here
a claim for administrative expenses under section 503 for
wages for post-petition work. Nor does Local 328 assert a
claim based on the consensual rejection of the Agreement
while its appeal of this issue was pending before the
district court. Finally, Local 328 does not argue that the
bankruptcy court lacked authority to order the interim
modifications.
III
A brief review of the context in which section 1113
was enacted is helpful to understand Local 328's argument on
appeal. Under section 365 of the Bankruptcy Code, a trustee
(or the debtor-in-possession) has the choice, subject to
court approval, of either assuming or rejecting an executory
contract. The rejection of an executory contract
"constitutes a breach of such contract . . . immediately
before the date of the filing of the petition." 11 U.S.C.
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365(g)(1). In 1984, the Supreme Court issued a decision
interpreting section 365, one portion of which prompted
Congress to enact section 1113 of the Bankruptcy Code. In
NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1984), the Supreme
Court held that collective bargaining agreements were
executory contracts for purposes of section 365, but that due
to the special nature of such agreements, the rejection of a
collective bargaining agreement should be governed by a
standard more strict than that applicable to other kinds of
contracts. See id. at 522 & n.6, 526. The Court suggested
that the rejection of a collective bargaining agreement would
result in a general unsecured claim against the bankruptcy
estate. Id. at 530-31 & n.12; see also In re Continental Air
Lines Corp., 901 F.2d 1259, 1265 (5th Cir. 1990). These
holdings were not what motivated the enactment of section
1113.
Congress's primary concern in enacting section 1113
was with one of the Court's other holdings in Bildisco --
that a debtor did not commit an unfair labor practice by
making unilateral changes to the terms and conditions of
employment, prior to formally rejecting a collective
bargaining agreement, because the agreement was no longer
enforceable upon the filing of a bankruptcy petition. 465
U.S. at 534. Under section 1113, a collective bargaining
agreement remains in effect after the filing of a petition in
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bankruptcy. A trustee may not make unilateral changes in the
terms or conditions of a collective bargaining agreement
unless the court fails to rule on an application for
rejection within the required time frame. 11 U.S.C.
1113(d)(2) & (f).
Congress recognized in enacting section 1113(e) that
on occasion a debtor may require emergency relief from the
collective bargaining agreement prior to rejection,
assumption or agreed-upon modification of the agreement.
Section 1113(e) thus provides:
If during a period when the collective
bargaining agreement continues in effect, and if
essential to the continuation of the debtor's
business, or in order to avoid irreparable
damage to the estate, the court, after notice
and a hearing, may authorize the trustee to
implement interim changes in the terms,
conditions, wages, benefits, or work rules
provided by a collective bargaining agreement.
Any hearing under this paragraph shall be
scheduled in accordance with the needs of the
trustee. The implementation of such interim
changes shall not render the application for
rejection moot.
11 U.S.C. 1113(e).3 Local 328 claims that the interim
3. The other provisions of section 1113 codify the standards
that must be met before a collective bargaining agreement may
be rejected. In Bildisco, the Supreme Court held that
rejection of a collective bargaining agreement was permitted
if the "debtor can show that the collective-bargaining
agreement burdens the estate, and that after careful
scrutiny, the equities balance in favor of rejecting the
labor contract." 465 U.S. at 526. The Court also held that
"[b]efore acting on a petition to modify or reject a
collective-bargaining agreement . . . the Bankruptcy Court
should be persuaded that reasonable efforts to negotiate a
voluntary modification have been made and are not likely to
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modifications permitted by the statute should be treated as
partial rejections of the collective bargaining agreement.
From this, it argues it is entitled to rejection damages
under section 365.
We note first that even were we to accept Local 328's
premise that the interim modifications constitute a partial
rejection, section 1113, which governs the rejection of
collective bargaining agreements, is silent as to how such a
rejection should be treated under section 365.4 Indeed,
courts have divided over whether a claim for damages is
permitted at all after the rejection of a collective
bargaining agreement under section 1113. Compare Truck
Drivers Local 807 v. Carey Transp., Inc., 816 F.2d 82, 93 (2d
produce a prompt and satisfactory solution." Id. Under
section 1113, before filing a petition to reject a bargaining
agreement, the debtor must make a proposal to the union,
"based on the most complete and reliable information
available at the time of such proposal, which provides for
those necessary modifications in the employees benefits and
protections that are necessary to permit the reorganization
of the debtor and assures that all creditors, the debtor and
all of the affected parties are treated fairly and
equitably," and must provide the union with the information
necessary to evaluate the proposal. 11 U.S.C. 1113(b)(1).
A court may approve an application for rejection only upon
finding that the debtor or trustee has made the required
proposal, that the union refused to accept the proposal
without good cause, and that the "balance of equities clearly
favors rejection of [the] agreement." 11 U.S.C. 1113(c).
Because Almacs never filed an application to reject the
Agreement, these provisions were not invoked.
4. Because the relevant language of section 365(g) has not
changed since Bildisco, collective bargaining agreements
would appear still to be subject to the section's general
provisions.
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Cir. 1987) (in balancing the equities to determine whether an
employer was permitted to reject a collective bargaining
agreement under section 1113, one factor to consider was "the
possibility and likely effect of any employee claims for
breach of contract if rejection is approved"); In re Maxwell
Newspapers, Inc., 146 B.R. 920, 934 (Bankr. S.D.N.Y.) (same),
rev'd on other grounds, 149 B.R. 334 (S.D.N.Y.), aff'd in
part and rev'd in part, 981 F.2d 85 (2d Cir. 1992); In re
Texas Sheet Metals, Inc., 90 B.R. 260, 272-73 (Bankr. S.D.
Tex. 1988) (same); and In re Moline Corp., 144 B.R. 75, 78-79
(Bankr. N.D. Ill. 1992) (making same assumption and
suggesting that because section 1113 says nothing about
effect of assumption or rejection, "[section] 365 must apply
to fill in the gap") with In re Blue Diamond Coal Co., 147
B.R. 720, 727-28 (Bankr. E.D. Tenn. 1992), aff'd, 160 B.R.
574, 576-77 (E.D. Tenn. 1993) (rejecting claim for damages
based on the rejection of a collective bargaining agreement).
Cf. Mass. Air Conditioning & Heating Corp. v. McCoy, 196 B.R.
659 (D. Mass. 1996) (assumption of collective bargaining
agreement governed by section 365).
We do not reach that question here, however, because
we hold that the language and structure of section 1113 do
not permit interim changes authorized thereunder to be
construed as "rejections" for purposes of section 365(g).
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We turn to the unambiguous text of the statute, giving
effect to its plain meaning. See Lomas Mortgage, Inc. v.
Louis, 82 F.3d 1, 3 (1st Cir. 1996). Section 1113(e)
provides that the trustee may implement "interim changes" and
that "interim changes shall not render the application for
rejection moot." Section 1113(e) clearly speaks of
"rejection" and "interim changes" as two different types of
actions. By choosing a different word, "change," to describe
the interim action, Congress surely intended for that action
not to have the consequences that would follow from a
"rejection." Indeed, section 1113(e) is explicit that
"implementation of such interim changes shall not render the
application for rejection moot." That "interim changes" do
not moot a "rejection" establishes that the former
constitutes relief different from the latter.
The framework of section 1113 also shows that "interim
changes" are not the same species as a "rejection." The
statute, by setting forth the procedures to be followed
before a debtor-in-possession "may assume or reject a
collective bargaining agreement," 11 U.S.C. 1113(a), or
"reach mutually satisfactory modifications of such
agreement," 11 U.S.C. 1113(b)(2), contemplates three final
actions that may be taken with respect to a particular
collective bargaining agreement. "Rejection" of the whole
agreement is one of these final actions.
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Each of the extensive provisions regarding rejection
suggests that a collective bargaining agreement is only
"rejected" once, in its entirety, not in bits and pieces.
This is because the debtor must make a proposal to modify the
agreement and meet with the union representatives to attempt
to reach consensus before "seeking rejection of [the]
collective bargaining agreement." 11 U.S.C. 1113(b).
Further, the court must make certain findings before
approving a petition for rejection. Id. 1113(c). Whatever
the effects of the rejection of a collective bargaining
agreement under section 1113, rejection is an act that
involves a final repudiation of the entire agreement.
Interim changes under section 1113(e), on the other hand,
are, by definition, not final. They only are implemented
pending the final act of assumption, modification or
rejection, while the agreement still remains otherwise in
effect.
Finally, by providing different standards for the
approval of "rejections" and "interim changes," Congress
clearly intended not to treat the latter as merely a category
of the former. The standards governing rejections have both
a procedural component and a substantive component. Before
the debtor may even file an application to reject a
bargaining agreement, it must make a proposal to the union
for modifications to the contract, and the application cannot
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be approved unless the union has rejected the proposal
without good cause. 11 U.S.C. 1113(b)(1) & (c)(2). The
debtor must also negotiate with the union in an attempt to
reach mutually satisfactory modifications. Id. 1113(b)(2).
The substantive component requires that the debtor's initial
proposal encompass only those modifications "necessary to
permit the reorganization of the debtor." Id. 1113(b)(1).
Because a plan of reorganization may not be confirmed if it
is likely to be followed by liquidation or the "need for
further financial reorganization," id. 1129(a)(11), the
modifications are proposed with a view to the long-run
success of the debtor's business.
The standards for "interim changes," on the other
hand, deal with the short term. Only the basic procedural
safeguards, "notice and a hearing," are required. The
substantive standard is that the changes must be "essential
to the continuation of the debtor's business." Id.
1113(e). This language suggests that "interim changes" are
only permitted under emergency conditions, when the debtor
otherwise would likely collapse. See In re Salt Creek
Freightways, 46 B.R. 347, 350 (Bankr. D. Wy. 1985); In re
Almac's, Inc., 159 B.R. 665, 666 (Bankr. D.R.I. 1993). The
scope of "interim changes" is more limited than the
modifications "necessary for reorganization." See Martha S.
West, Life After Bildisco: Section 1113 and the Duty to
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Bargain in Good Faith, 47 Ohio St. L.J. 65, 146 (1985).
Because "interim changes" are ordered to ensure the short-
term viability of the debtor, they do not dictate the final
decision to assume, reject or mutually modify the original
collective bargaining agreement.
If Congress had intended the result Local 328 urges,
it could easily have provided so by inserting an explicit
provision allowing for a claim, by calling "interim changes"
"partial rejections," or by using other language from which
it could be definitively inferred that "interim changes" were
"rejections" subject to the consequences delineated in
section 365. The language Congress actually used does not
suggest this treatment. There is simply no evidence that
Congress intended "interim changes" to be the same as
"rejection."
Local 328 argues that not treating the section 1113(e)
changes here as a rejection would lead to an unreasonable
outcome because the modifications in this case had the same
effect as a rejection. See Massachusetts v. Blackstone
Valley Elec. Co., 67 F.3d 981, 986 (1st Cir. 1995) ("[P]lain
meaning must govern [a statute's] application, unless a
palpably unreasonable outcome would result."). Without
adopting Local 328's premise, we conclude that the result we
reach is far from unreasonable. Congress could have thought
the denial of a remedy to compensate for interim
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modifications was a reasonable quid pro quo to the debtor, in
exchange for the protective benefits that flow to employees
from allowing the collective bargaining agreement to remain
in effect following the filing of a Chapter 11 petition.
Before Congress enacted section 1113, a debtor was permitted
to make unilateral modifications to a collective bargaining
agreement after filing a petition in bankruptcy and such
modification did not constitute an unfair labor practice.
Bildisco, 465 U.S. at 534. In section 1113, Congress
provided that collective bargaining agreements are
enforceable against the debtor after the filing of a petition
for reorganization. 11 U.S.C. 1113(c), (e) & (f); 5
Collier on Bankruptcy 1113.01[4][b], at 1113-14 to 1113-15
(Lawrence P. King ed., 15th ed. 1995). In exchange for this
heightened protection, Congress could reasonably have
required employees to accept decreased wages and benefits in
an emergency before any final action on the collective
bargaining agreement is taken, without providing for the
employees to recover all or part of the wages and benefits
lost in the interim reductions.
The interim changes authorized by the bankruptcy court
under section 1113(e) were not, in and of themselves,
"rejections" of the Agreement within the meaning of the
Bankruptcy Code.
Affirmed.
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