Opinion ID: 774948
Heading Depth: 1
Heading Rank: 2

Heading: whether the international has an equity interest in the local

Text: 9 The bankruptcy code establishes a strict priority for satisfaction of obligations of a debtor. 11 U.S.C.§§ 1129(b) (2)(B). Claims of equity holders are always junior to claims of both secured and unsecured creditors. See Everett v. Perez (In re Perez), 30 F.3d 1209, 1214 (9th Cir. 1994). Under the new value exception that this circuit recognizes, an equity holder may retain its interest only if it contributes sufficient new value to ensure successful reorganization. See Case v. Los Angeles Lumber Prods. Co., 308 U.S. 106, 121-22 (1939); Bonner Mall P'ship v. U.S. Bancorp Mortgage Co. (In re Bonner Mall P'ship), 2 F.3d 899, 907 (9th Cir. 1993). 10 The absolute priority rule is generally applied to forprofit corporations facing bankruptcy, where an equity owner seeks to retain property, often represented by stock. See, e.g., Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 208 (1988); N. Pac. Ry. Co. v. Boyd, 228 U.S. 482, 508 (1913); see also John D. Ayer, Rethinking Absolute Priority After Ahlers, 87 Mich. L. Rev. 963, 968-71 (1989)(discussing how the goal of limiting collusion between secured creditors and stockholders in private sector railroad ventures gave rise to the absolute priority rule). The only apparent circuit decision to deal directly with the issue of whether entities affiliated with a not-for-profit organization have equity interests for purposes of the absolute priority rule held that they did not because the essence of an equity interest was an ownership or an interest in the organization's profit. See Wabash, 72 F.3d at 1318-19. 11 In Wabash, the Seventh Circuit considered the situation of the Wabash Valley Power Association, a not-for-profit electricity-generating cooperative controlled by members who were themselves electric utility cooperatives. The Wabash cooperative filed for bankruptcy after an ill-fated investment in nuclear power. A creditor then claimed that Wabash's reorganization plan violated the absolute priority rule in part because it allowed Wabash's members to retain control of it. The court held that compliance with the absolute priority rule depended on whether the members held an equity interest, and whether they retained property in the cooperative because of that interest. Id. at 1313. The court held they did not because members of the not-for-profit cooperative could not use whatever control they had over the utility cooperative to generate present or future profits from it and the members did not have an ownership interest in corporate assets. Where control does not convey the ability to make commercial decisions that generate profits or corporate ownership, there is no property retained on account of an equity interest and therefore no absolute priority problem. Id. at 1318-19. Since the cooperative's members had no equity interest, the plan did not violate the absolute priority rule. 12 Growers attempt to distinguish Wabash on three principal grounds. First, they contend that local unions are really subdivisions of the parent national or international organizations and are therefore unlike the independent electric utility cooperatives that banded together to create the electricity generating association in Wabash. 13 It is true that local unions are generally required to abide by the national organization's constitution. See William M. Leiserson, American Trade Union Democracy 87 (1959); Myron Roomkin, Union Structure, Internal Control, and Strike Activity 29 Indus. & Lab. Rel. Rev. 198, 199 (1976). It does not follow, however, that the International controls the Local or profits from it, so that bankruptcy laws should regard the International as an owner that can be forced to choose between making contributions sufficient to sustain the Local or causing the Local to be liquidated. Such a choice makes eminent good sense in the context of a for-profit corporation in bankruptcy. Such a corporation's equity owners should be required to choose between contributing value or forcing liquidation of their interest in a commercial venture. This is because the equity owners' only concern is with the profitability of the corporation, and the decision is purely an economic one. This is what the Seventh Circuit recognized in Wabash. 72 F.3d at 1318 (When associated with an equity interest in a business corporation, control contributes to value -hence the premium investors are willing to pay for a controlling interest in a business corporation.). 14 In the labor relations context, the absolute priority rule makes even less sense than it did in the electric utility context in Wabash. Labor unions are governed by a unique set of labor relations laws that are designed in large measure to insure that the workers are represented by the collective bargaining representative of their choice. The National Labor Relations Act (NLRA) provides in part: 15 Employees shall have the right to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection . . . 16 29 U.S.C. §§ 157 (1998). 17 Thus workers' freedom to choose a bargaining representative depends on the independence of a local from the international union with which it is affiliated. See NLRB v. Gen. Elec. Co., 418 F.2d 736, 755 (2nd Cir. 1969). The Second Circuit there held that the NLRA commands that bargaining representation chosen by the workers be exclusive, and that the failure to distinguish between local and international unions undermines that goal. If the International were to be regarded as an equity owner as Growers contend, then the International's unwillingness or inability to contribute a sufficient value to ensure the Local's reorganization would force the liquidation of the Local. This would in turn destroy the federally protected rights of the workers represented by the Local in the collective bargaining process. 18 It is therefore not helpful for Growers to argue that the International would take over the collective bargaining role formerly held by the union; federal labor law has steadfastly recognized the separation of the International from its local affiliate. See United Mine Workers v. Coronado Coal Co., 259 U.S. 344 (1922); Coronado Coal Co. v. United Mine Workers, 268 U.S. 295 (1925); see also In re Int'l Bhd. of Elec. Workers, 121 N.L.R.B. 143, 146-47 (1958)(holding that an international union's constitution regulating the local did not make the local into a mere branch of the international union). The two entities are distinct even if they have senior officials in common. Whisper Soft Mills, Inc. v. NLRB, 754 F.2d 1381, 1385 n.4 (9th Cir. 1984) (That members of the Council's bargaining committee had formal ties to the [International] is irrelevant.). The fact that the two entities share many goals and bear responsibilities to each other does not imply that all their goals are shared, or that the international union owns the local one. United States v. Int'l Union of Petroleum & Indus. Workers, 870 F.2d 1450, 1454 (9th Cir. 1989)([I]nternational and local unions are frequently in adversarial positions. They often engage in lawsuits, internal protests, and complaint proceedings against one another.). 19 As a consequence of this distinction between local and international unions, the Local is financially independent. Its ability to collect member dues does not arise from its affiliation with the International, even if the funds that the Local pays to the International come from member dues. See Int'l Bhd. of Elec. Workers v. Foust, 442 U.S. 42, 50-51 (1979). Similarly, the International is not financially responsible for local union activities, except to the extent specified in a contract or other limited circumstances consistent with the labor laws. See e.g., United States v. Dist. Council United Bhd. of Carpenters & Joiners, 778 F. Supp. 738, 757-58 (S.D.N.Y. 1991)(imposing civil RICO liability on international union for corrupt activities in local). But see Note, Collective Institutional Guilt: The Emergence of International Unions' RICO Liability for Local Union Crimes, 21 Am. J. Crim. L. 291 (1994), (arguing against RICO liability of international unions for local union offenses because such liability conflicts with premises of federal labor law). See also Shimman v. Frank, 625 F.2d 80, 97-99 (6th Cir. 1980) (holding that unless the international union authorizes or encourages illegal local union activity, the international union cannot be held liable), overruled on other grounds by Shimman v. Int'l Union of Operating Eng'rs, Local 18, 744 F.2d 1226 (6th Cir. 1984) (en banc). 20 Growers also stress that the International's constitution, which governs the Local, contains escheat provisions covering the Local's assets. The International's constitution provides in relevant part that upon dissolution or disaffiliation, the Local's assets: 21 shall likewise be turned over to the General President [or the International] or his representative . . . to be held until such time as the subordinate body may be reinstated or reorganized. If no reinstatement or reorganization occurs within a period of two (2) years such funds shall be transferred to the general fund. 22 Constitution of the International Brotherhood of Teamsters, Art. X, Sec. 13. Growers rely on this provision due to the Wabash holding that the members of the cooperative had no prospective ownership rights in corporate assets because under Indiana law the assets would escheat to the state upon liquidation. See Wabash, 72 F.3d at 1309, 1313, 1317. Under the International's constitution in this case, the International would take possession of the Local's assets upon the Local's liquidation, but the International would be required to keep these assets segregated from its general fund for a period of at least two years. After two years, however, the International could transfer those assets to its general fund. Thus, the International does have a type of ownership interest, but it is a highly conditional, future interest. 23 In Wabash, the Seventh Circuit identified three components of an equity interest: control, profit share, and ownership of corporate assets. Id. at 1318. In Wabash, the only component present was control. Here, the International does not have control over the operations of the Local or any type of profit share in the Local because, as explained above, the Local is financially and legally independent of the International. While control in the absence of profit share and ownership of corporate assets does not rise to an equity interest, the Supreme Court has rejected the theory that a profit share or ownership interest may be disregarded simply because it has no present value. Ahlers, 485 U.S. at 207-08. In addition the Court has explained that, the relevant legislative history suggests that Congress' meaning was quite broad. `Property includes both tangible and intangible property.'  Id. at 208, 108 S. Ct. 963. 24 In Ahlers, the debtors sought to keep their ownership interest in their bankrupt family farm. Id. at 199, 108 S. Ct. 963. The bankrupt farmers attempted to come within the new value exception by contributing labor, experience, and expertise to the farm. Id. at 201, 108 S. Ct. 963 (internal quotation marks omitted). Had the debtors prevailed in their argument, they would have enjoyed immediate possession of the farm, a right to all future profits, and control over farm operations. Here, the possibility that the International will come into unfettered possession of the Local's assets is remote at best. In addition, we must take into account the labor law context in which the International's escheat rights operate. It is clear from the text of the International's constitution that the primary purpose of these escheat rights is to preserve the Local's assets to facilitate a reorganization of the Local within two years. 25 Because the particular escheat provision in the constitution does not create any immediate ownership by the International in the Local, and because there are no other indicia of ownership by the International, we hold that the International has no ownership interest in the assets of the Local for purposes of the absolute priority rule. We need not decide whether the policy of the NLRA to protect workers' rights to be represented by their chosen representatives would override the operation of the absolute priority rule in the event that sufficient indicia of ownership were present. 26 Neither are we persuaded by Growers' contention that, unlike the members of the Wabash cooperative, the Local's members should be considered its owners. The Local's members have a right to set the amount of their union dues, and the Local has a fiduciary responsibility to use the dues for the members' benefit. See 29 U.S.C. §§ 411(a)(3)(1998)(allowing members to set the amount of their dues); 29 U.S.C.§§ 501(a) (1998)(requiring union locals to spend dues to benefit members). Yet the members have even less control over the Local than did the members of the Wabash cooperative who were found not to have an equity interest. See Wabash , 72 F.3d at 1318. The members cannot share in any profits from the Local or control its assets. On the contrary: once dues are paid, they become the property of the local union. See Air Transp. Ass'n v. Prof'l Air Traffic Controllers Org. (PATCO) (In re Prof'l Air Traffic Controllers Org. (PATCO)) , 724 F.2d 205, 209 (D.C. Cir. 1984). 27