In the

United States Court of Appeals

For the Seventh Circuit ____________

No. 05-3121

IN RE:

UAL CORPORATION, et al.,

Debtors.

UNITED RETIRED PILOTS BENEFIT

PROTECTION ASSOCIATION, et al.,

Appellants,

v.

UNITED AIRLINES, INC., et al.,

Debtors-Appellees.

____________

Appeal from the United States District Court

for the Northern District of Illinois, Eastern Division.

No. 05 C 1202—John W. Darrah, Judge.

____________

ARGUED FEBRUARY 24, 2006—DECIDED MARCH 31, 2006

____________

Before BAUER, POSNER, and WILLIAMS, Circuit Judges.

POSNER, Circuit Judge. In the course of United Airlines’

bankruptcy, the bankruptcy judge, seconded by the district judge, allowed United to eliminate the contractual

pension rights of its 3,000 or so retired pilots without a

hearing to determine whether they should receive “replacement” benefits (compensation for giving up those rights),
2 No. 05-3121

which United had given its active pilots. The association

representing the retired pilots has appealed. (The “et al.”

parties on both sides of the case can be ignored.) Recently

United emerged from bankruptcy, and it argues that this

renders the appeal moot. That is incorrect. All that the

retired pilots are seeking in the first instance is a hearing

before the bankruptcy judge, and we shall see that the judge

could at that hearing deny any relief that would jeopardize

United’s newly recovered solvency. And there is no argument that the confirmed plan resolves the claims made by

the retired pilots in this appeal.

United had a (frequently amended) collective bargaining agreement with the Air Line Pilots Association

(ALPA) that among other things established defined-benefit

pension plans for both active and retired pilots employed by

United. The plans provided both tax-qualified and non-taxqualified pension benefits; the distinctions relevant to this

case are that the latter are not insured by the Pension Benefit

Guaranty Corporation or protected by the provisions of

ERISA relating to the termination of pension plans. 29

U.S.C. §§ 1321(a), (b)(8).

Normally a bankruptcy trustee, or as in this case a

debtor in possession, can freely reject the executory portion of a contract. But section 1113 of the Bankruptcy

Code permits the rejection of the executory portion of a

collective bargaining agreement only with the approval of

the bankruptcy judge after negotiations looking to mutually

satisfactory modifications of the agreement, 11 U.S.C.

§ 1113(b)(2), and only if (the negotiations failing) the

judge determines that “the balance of the equities clearly

favors rejection of such agreement.” § 1113(c)(3). Wanting

to lift the albatross of pension obligations from its shoulders

as well as to reduce the pilots’ wages, United filed an
No. 05-3121 3

application under section 1113 for rejection of the collective bargaining agreement and proceeded to the negotiation

phase with ALPA. When ALPA made clear that it would

not represent the interests of the retired pilots in

the negotiations, the latter moved the bankruptcy judge

to appoint a representative to participate in the negotiations

on their behalf. The purpose of the motion is a little obscure.

The retired pilots already had a representative—the United

Retired Pilots Benefit Protection Association, the appellant.

What they really wanted was for the judge to order United

and ALPA to negotiate with URPBPA as well. The judge

refused, and as a result the retired pilots did not participate

in the negotiations. The judge’s refusal is one of the orders

that the association is asking us to reverse.

While the section 1113 proceeding was going on,

United and ALPA negotiated an agreement (the parties

call this the “Letter Agreement”) to modify the collective bargaining agreement. The modification was intended to eliminate the pension plans created by the

agreement but compensate the active pilots, that is, the

pilots represented by ALPA, by giving them convertible notes valued at $550 million and other consideration, including a defined-contribution pension plan. In

exchange for these concessions ALPA agreed not to

oppose United’s attempt to terminate the collectively

bargained pension plans under 29 U.S.C. § 1341, the provision of ERISA that governs the voluntary termination of

pension plans.

With the agreement to modify the collective bargaining

agreement, United’s application under section 1113 to reject

the agreement entered a state of suspended animation, since

the modification of the collective bargaining agreement

by the Letter Agreement would, if that agreement was
4 No. 05-3121

approved, give United the relief it wanted without its

having to persuade the bankruptcy judge to reject the

collective bargaining agreement.

United asked the bankruptcy judge to approve the Letter Agreement under 11 U.S.C. § 363(b)(1), which requires

that the bankruptcy judge’s approval be obtained for

contracts made by the debtor during the bankruptcy that are

outside the ordinary course of business, as the Letter

Agreement obviously was. The judge gave his approval,

and this is the other order challenged on this appeal.

The retired pilots argue that he shouldn’t have approved the

agreement without giving them a chance to participate in

the negotiations for replacement benefits; such participation

might, they argue, have resulted in their receiving replacement benefits too.

The order of approval extinguished any rights that

the retired pilots might have had under the collective

bargaining agreement. It was the equivalent of a final

judgment in a suit for breach of contract, and therefore

appealable as a severable phase of the bankruptcy proceeding. Bank of America, N.A. v. Moglia, 330 F.3d 942, 944

(7th Cir. 2003). The earlier order refusing to appoint a

representative to negotiate with United and ALPA on the

retired pilots’ behalf over replacement benefits to compensate for the modification of the collective bargaining

agreement was interlocutory, but interlocutory to the

order extinguishing their contract rights and therefore

reviewable by us with it.

After the bankruptcy judge approved the Letter Agreement, United withdrew its section 1113 motion for rejection

of the collective bargaining agreement. The approval did

not, however, terminate the pension plans. For that to

happen an application had to be made to and approved by
No. 05-3121 5

the bankruptcy judge under one of two sections of ERISA.

Under the first, 29 U.S.C. § 1341 (voluntary termination), the

employer asks for termination. Under the second, 29 U.S.C.

§ 1342 (involuntary termination), the Pension Benefit

Guaranty Corporation, which insures vested rights under

ERISA pension plans, 29 U.S.C. § 1322(a); Pension Benefit

Guaranty Corp. v. LTV Corp., 496 U.S. 633, 637-38 (1990),

asks. United started down the voluntary-termination road,

as we know, but withdrew when the PBGC applied for

involuntary termination. The PBGC anticipated that if the

pension plans were not terminated, and so continued

generating new vested pension rights, the plans would go

into default and as the insurer of those rights the PBGC

would face a staggering liability.

The bankruptcy judge granted the PBGC’s application

in an order that is currently on appeal to the district court.

Assuming the order is upheld, the PBGC will become the

obligor of the retired pilots’ vested pension rights, though

only to a limited extent. Although airline pilots must retire

at the age of 60, the PBGC does not begin to pay full benefits

until the retiree reaches the age of 65. Also, as we noted

earlier, it does not replace any non-tax-qualified benefits.

And it pays a maximum of $44,388 in benefits to participants in plans terminated, as this one was, in 2004. What is

more, while the benefits that PBGC will be paying the active

pilots when they retire will be on top of the replacement

benefits that United has given them in exchange for the

surrender of their rights under the pension plans, the

retirees have received no replacement benefits. They

do have unsecured claims arising from their contractual

pension rights, to the extent they’re not compensated by the

PBGC insurance, but according to the parties the value of

those claims has not yet been determined by the bankruptcy

court. (That’s a puzzle; the retired pilots have debt claims
6 No. 05-3121

and debt is converted to stock in United’s plan of reorganization and it isn’t possible to confirm the plan without

knowing who gets how much stock. But it not a puzzle we

need to unravel in order to decide this appeal.) Nor do we

know what fraction of the claims will actually be paid. All

that is clear is that the retired pilots have some financial

stake in pursuing this litigation.

In the negotiations leading up to the Letter Agreement,

the active pilots, represented by ALPA, received as

we know sizable compensation for surrendering their

right to fight for their pension rights. The retired employees

were bound to receive less. They lost less; a retired pilot will

have enjoyed the benefit of full pension payments since his

retirement, while an active pilot who is near retirement will

have been contributing to the pension plan for many years

without receiving any benefits. More important, the active

pilots had a stick to use against United—the threat of a

strike—that the retirees didn’t have. But the retired pilots

received not merely lower replacement benefits than the

active pilots; they received nothing—and with no opportunity to negotiate for something.

United defends this result primarily on the ground that

two parties to a contract are always free to modify it

without considering the views of any third parties. United

and ALPA are the only parties to the collective bargaining agreement, and a union’s duty to bargain collectively on

behalf of the members of the bargaining unit that the union

represents does not extend to retired workers, because they

are not members of the unit. Allied Chemical & Alkali Workers

of America, Local Union No. 1 v. Pittsburgh Plate Glass Co., 404

U.S. 157, 166, 182 n. 20 (1971). The retirees do not argue that

they are third-party beneficiaries of the collective bargaining

agreement. The argument would be unlikely to prevail,
No. 05-3121 7

which may be why it hasn’t been made. The test for whether

someone is a third-party beneficiary is whether the express

parties to the contract intended the third party to have the

right to enforce the contract. A.E.I. Music Network, Inc. v.

Business Computers, Inc., 290 F.3d 952, 955 (7th Cir. 2002);

Vidimos, Inc. v. Laser Lab Ltd., 99 F.3d 217, 219-20 (7th Cir.

1996). Generally, the test is deemed satisfied if a member of

the bargaining unit seeks to enforce the collective bargaining agreement. E.g., United Food & Commercial Workers Local

951 v. Mulder, 31 F.3d 365, 370 (6th Cir. 1994). It is satisfied

if the beneficiary under a welfare plan established by a

collective bargaining agreement sues for benefits. Hazen

v. Western Union Tel. Co., 518 F.2d 766, 767-70 (6th Cir. 1975).

But neither employer nor union would want to create a

situation in which retirees, whose interests diverge from

those of the active employees, would be able to

block modification of the collective bargaining agreement.

ALPA adds, rather unhelpfully, that the Railway

Labor Act, 45 U.S.C. §§ 151 et seq., which governs labor

relations in the airline industry as well as the railroad

industry, does not permit an employer to engage in collective bargaining with any entity other than the union that

represents its employees. 45 U.S.C. §§ 152 Fourth, Seventh.

That rule would not prevent the employer from negotiating with retirees, who are no longer members of the bargaining unit, if the retirees could derail or impede the

negotiations between the parties to modify the collective

bargaining agreement. An agreement to modify or abrogate a collective bargaining agreement doesn’t affect taxqualified pension rights created by the agreement until

those rights are terminated by a separate order under

ERISA. United needed that order for its negotiations with

ALPA to give it what it ultimately wanted, namely the

termination of the pension plans.
8 No. 05-3121

The plans have been terminated, as we said, subject to

appeal. The retired pilots are not complaining about the

termination in this appeal but about being cut out of an

opportunity to obtain replacement benefits, as the active

pilots were able to do by virtue of their representation

by ALPA, in the negotiations that resulted in the Letter

Agreement that the judge approved under 11 U.S.C.

§ 363(b)(1). The question presented by the retired pilots’

appeal boils down to whether the bankruptcy judge

could approve that agreement without giving any consideration to the retired pilots’ interests.

What interests? More precisely, what legally protected

interests? United points out that only “interested parties”

may participate in a hearing on the debtor’s proposal to

reject a collective bargaining agreement, 11 U.S.C.

§ 1113(d)(1), and we have held that “interested parties”

include only the parties to (or a guarantor of) the agreement.

In re UAL Corp. (IFS), 408 F.3d 847, 851 (7th Cir. 2005). It is

true that In re Century Brass Products, Inc., 795 F.2d 265, 274-

76 (2d Cir. 1986), had held that retirees are “employees”

within the meaning of section 1113(b), and so are entitled to

be consulted about the proposal that the employer is

required to make as a preliminary to moving the bankruptcy judge to reject the collective bargaining agreement.

But Century Brass had not discussed whether the retirees

were interested parties under section 1113(d), entitling them

to oppose the rejection of the agreement, which was the

subsection in question in IFS. At most, Century Brass injects

some uncertainty concerning the retired pilots’ rights in a

section 1113 proceeding, and we shall see that despite the

abandonment of that proceeding by United this uncertainty

could have a bearing on our decision. For the moment,

however, the only relevant point is that United’s argument
No. 05-3121 9

puts the cart before the horse. There was no section 1113

hearing.

United notes that section 1114, which governs give-ups of

medical benefits, expressly requires the appointment of a

representative for the beneficiaries in negotiations for such

give-ups (corresponding to the pre-rejection negotiations

under section 1113). This implies, United argues, that no

representative need be appointed for section 1113 negotiations. The argument is unpersuasive. In enacting section

1114, Congress was reacting to a particular issue, that of

termination of medical benefits, in a particular bankruptcy,

that of the LTV corporation. Susan J. Stabile, “Protecting

Retiree Medical Benefits in Bankruptcy: The Scope of

Section 1114 of the Bankruptcy Code,” 14 Cardozo L. Rev.

1911, 1926-27 (1993). There is no indication that Congress

was specifying or disallowing procedures to be used in

section 1113 proceedings. In any event, the question presented by this appeal is not the procedures required by

section 1113, since no order was ever issued under that

section. It is what negotiating rights if any the retired pilots

should have had with regard to the agreement that the

bankruptcy judge approved under section 363(b)(1), an

agreement that confirmed the receipt of replacement

benefits by the active pilots and the receipt of nothing by the

retired ones.

Normally, as we said, the parties to a contract can modify

it freely without regard to the impact on the financial

interests of third parties who are not third-party beneficiaries. But the setting here is abnormal. The modification of

the collective bargaining agreement had to be approved

by the bankruptcy judge under section 363(b)(1) because it

involved payment from the debtor’s estate (the replacement

benefits) other than in the ordinary course of the debtor’s
10 No. 05-3121

business. In re Kmart Corp., 359 F.3d 866, 872 (7th Cir. 2004).

The reason for the requirement of obtaining judicial approval in such a case is that contracts made by a debtor in

bankruptcy that are not in the ordinary course may have an

impact on the other creditors in the bankruptcy proceeding.

United States v. Goodstein, 883 F.2d 1362, 1367 (7th Cir. 1989);

In re Abbotts Dairies of Pennsylvania, Inc., 788 F.2d 143, 150

(3d Cir. 1986); In re Continental Air Lines, Inc., 780 F.2d 1223,

1227-28 (5th Cir. 1986). The criteria for approval, therefore,

are whether the transaction makes good business sense, in

which event the creditors as a whole should benefit, In re

Schipper, 933 F.2d 513, 515 (7th Cir. 1991), and whether it

preserves the priorities among the creditors. In re Kmart

Corp., supra, 359 F.3d at 872-73.

United argues that allowing the retired pilots into the

negotiations that resulted in the Letter Agreement that the

bankruptcy judge approved could not have increased the

value of the estate because the retired pilots have no right to

enforce the collective bargaining agreement. Which is true,

but does not carry quite as far as United thinks. Remember

that the Letter Agreement provided that ALPA would not

oppose United’s effort to terminate the pension plans. Well,

the retired pilots could oppose too, though probably not in

a section 1113 proceeding (that is the uncertainty we

mentioned earlier). The pension plans could be terminated

only by proceedings under 29 U.S.C. §§ 1341 or 1342, and

the retired pilots both participated in and argued against the

PBGC’s application for involuntary termination of the

pension plans under 29 U.S.C. § 1342. They lost—maybe; the

case is on appeal. Surrendering the right to oppose, which

doubtless they, like the active pilots, would have done in

exchange for replacement benefits (better the bird in the

hand), might have been worth something to the debtor’s

estate, for example if it had headed off the appeal from
No. 05-3121 11

termination now pending in the district court, with the

possibility of a further appeal to this court (and beyond).

Had United thought the retired pilots worth buying off, it

would have offered them something for a “no fight” clause

similar to the one in the Letter Agreement. The fact that

United did not do this is evidence that the retired pilots had

nothing to “sell.” But it is not conclusive evidence. Section

363(b)(1)’s requirement that the debtor obtain judicial

approval of agreements that are outside the ordinary course

of business signifies a degree of congressional distrust of the

contractual process in bankruptcy. In re Lionel Corp., 722

F.2d 1063, 1071 (2d Cir. 1983). The fear is that the debtor

who steps out of the ordinary course of business may be

harming creditors as a whole or favoring one creditor over

the others without a valid ground. But the criteria for

approval—whether the transaction makes good business

sense and does not disturb the creditors’ rights inter se—do

not argue compellingly for requiring the debtor to negotiate

with creditors seeking special consideration just because

they may be in a position to throw a monkey wrench into a

transaction otherwise highly advantageous to the debtor

and the creditors as a whole.

The fact that United is warning us that the retired pilots

are threatening to derail the reorganization and plunge

United back into bankruptcy is hardly evidence that getting

the retired pilots “on board” the Letter Agreement might

indeed have been in the best interests of the estate; it is

forensic advocacy; it is the argument we would expect to be

made any time someone claimed compensation for not

having tried to derail the bankruptcy proceeding. But what

is true is that the already daunting complexity of major

corporate bankruptcies would be multiplied if anyone

with some potential blocking power, yet whom the trustee

or debtor in possession had not thought it worthwhile
12 No. 05-3121

trying to pay to buy peace with, could insist on negotiating rights as a condition of the bankruptcy judge’s approving a transaction out of the ordinary course.

Even if, despite what we have just said, the bankruptcy

judge should have conditioned approval of the section

363(b)(1) agreement on the retired pilots’ being made

negotiating partners with United and the union, there is

no longer any feasible remedy that a court could order. To

avoid the unraveling of the section 1342 proceeding and

perhaps of the entire bankruptcy (though that seems

unlikely), we would not order the Letter Agreement vacated. That would be a “logical” remedy but unnecessarily

disruptive. All we could do would be to direct the bankruptcy judge on remand to determine what he would have

insisted that the retired pilots receive in the agreement, as a

condition of his approving it, had he realized they had the

same kind of interest as the active pilots, namely the interest

conferred by a right to mount an opposition to the termination of the pension plans. But there would be no objective

basis for calculating the value that such a right would

command in a hypothetical negotiation.

We conclude that the denial of relief to the retired pilots

should be, and it is,

AFFIRMED.
No. 05-3121 13

A true Copy:

Teste:

 _____________________________

Clerk of the United States Court of 

Appeals for the Seventh Circuit 

USCA-02-C-0072—3-31-06