Opinion ID: 506588
Heading Depth: 2
Heading Rank: 1

Heading: Pay Raise for the Hotel Workers

Text: 32 On May 30, 1980, the day before Rodriguez was appointed as trustee and at a point in time when the hotel itself was debtor in possession, an application was filed with the bankruptcy court to reject an existing collective bargaining agreement between the hotel and Local 610 of the Gastronomical Workers Union. 10 Local 610 represented the bulk of the hotel's employees. The stated reason for requesting rejection of the collective bargaining agreement was that the agreement had become onerous and burdensome to the hotel, because, among other things, it required the hotel to employ unnecessary employees and called for substantial pay raises the hotel could not afford. 11 Once Rodriguez became trustee, he was informed of the application to reject, and he undertook to negotiate a new agreement with Local 610. 33 Kagan testified that he discussed the status of the agreement and the financial affairs of the hotel with Rodriguez before Rodriguez began negotiating. He stated that he informed Rodriguez that certain cost-cutting measures, including rejecting the pay raises in the agreement, were crucial to the hotel's future. To this Rodriguez reportedly replied that he would not sign any contract with the union that gives them an increase or limits our job flexibility. Kagan's testimony in this regard is specifically corroborated by contemporaneous memoranda sent to Rodriguez wherein he detailed the hotel's precarious financial condition and especially noted the importance of lowering payroll costs by rejecting the pay raises for Local 610. Nevertheless, on October 30, 1980, Rodriguez entered into a stipulation with Local 610 granting the union members almost exactly the same pay raise they would have received under the collective bargaining agreement. On December 3, 1980, the bankruptcy court approved the stipulation. 34 Finding that Rodriguez granted the pay raises without any logical explanation, 71 B.R. at 421, the district court surcharged Rodriguez $1,260,000 for the cost to the estate of the pay raises. This figure was derived from Kagan's testimony that the base payroll for the hotel was approximately $6,000,000 and that Rodriguez granted two consecutive yearly seven percent pay raises. 12 For 1981, the year of the first pay raise, the estate paid an extra seven percent of $6,000,000 or $420,000. For 1982, Kagan said, the hotel paid that same $420,000 again, plus an additional $420,000 for the second pay raise. Kagan also testified that Rodriguez agreed to a third twelve percent raise to begin in 1983, but, because the hotel closed immediately after it went into effect, the loss was minimal. 35 Rodriguez contends that the district court clearly erred in finding that he intentionally breached his fiduciary duty in agreeing to the pay raise. We disagree. The evidence amply supports the court's finding that Rodriguez acted contrary to sound advice and to the detriment of the estate in approving pay raises which the estate already had acted to reject. In combination with Rodriguez's other actions, we think this evidence is consistent with the conclusion that Rodriguez acted intentionally in approving the raises, in order to placate workers and to prolong the administration of the estate and the financial benefits accompanying that administration. The fact that Rodriguez can draw a contrary inference from this and other evidence is irrelevant; the question before us is only whether the inference the fact finder chose to draw was clearly wrong, and we think it was not. 36 Rodriguez also claims that he is immune from liability for the pay raises because the stipulation he negotiated was approved by the bankruptcy court. As a general matter, as we have already discussed in the context of the Mosser case, we agree with Rodriguez that a trustee acting with the explicit approval of a bankruptcy court is entitled to derived judicial immunity. See page 940 supra; see also, e.g., Lonneker Farms, Inc. v. Klobucher, 804 F.2d 1096, 1097 (9th Cir.1986). But as we have also said, such judicial immunity is contingent upon candid disclosure to the court and the creditors of the relevant circumstances surrounding the proposed action. See Mosser, 341 U.S. at 274, 71 S.Ct. at 683. Only after such disclosure has been made, and the court is aware of the pertinent facts, does judicial approval become meaningful. Here, Rodriguez has been surcharged precisely because he did not disclose, because he presented to the court as part of a plan of reorganization a stipulated pay raise that he knew was unworkable. We will not permit Rodriguez to shelter under the protective mantle of judicial immunity when he intentionally failed to disclose the obvious and fatals flaws in the action for which he sought approval. 37 Rodriguez's final challenge to the pay raise surcharge is a mathematical one. Although conceding that the court's use of a $6,000,000 payroll base and two seven percent pay raises is correct, 13 Rodriguez argues that the resultant surcharge should be $869,400, not $1,260,000. Rodriguez agrees with the court that a seven percent pay raise in 1981 created additional 1981 payments of $420,000. For 1982, Rodriguez says, this $420,000 should be added to the base of $6,000,000 yielding $6,420,000; and seven percent of $6,420,000 is $449,400. Adding $420,000 for 1981 and $449,400 for 1982, Rodriguez asserts that $869,400 is the correct surcharge. But Rodriguez conveniently overlooks the fact that for 1982 the estate must have paid both the original 1981 pay raise (still effective) of $420,000 and the 1982 addition of $449,000. The total for the two years is thus $1,289,400. In using the sum $1,260,000, the district court was overgenerous to Rodriguez because it neglected the compounding effect of consecutive yearly pay raises. Lopez, however, has not challenged the sum on this or any other ground, and so we let the surcharge of $1,260,000 stand.B. Casino Workers' Back Pay Award For Being Illegally Fired 38 The basis for this surcharge was summarized in this way by the district court. 39 In addition to the mentioned collective bargaining agreement with the Gastronomical Workers Union, Local 610, the hotel had a second collective bargaining agreement with the casino union, known as Union de Empleados de Casinos de Puerto Rico. It was obvious, and Kagan had so advised, that the casino contract had to be rejected to save approximately $1 Million a year. Rodriguez Estrada failed to follow said recommendation. About a year elapsed. The pressure mounted and, finally, in the summer of 1981, the trustee proceeded to reject the casino collective bargaining agreement. The trustee's post-rejection actions regarding the union were erratic. He failed to consistently implement the rejection, thereby causing extreme labor unrest which ultimately resulted in a strike of the casino workers. The strike lasted until the hotel closed in 1983. During the course of his dealings with the casino workers, defendant Rodriguez Estrada unlawfully fired the striking workers, against the advice of counsel. The National Labor Relations Board determined that he had indeed incurred in unfair labor practices and ordered the workers' reinstatement with back pay. Testimony received by the court estimated the back pay to be approximately $1 Million. 40 71 B.R. at 421. Because the exact amount that the estate would have to pay out in back pay was uncertain at the time of trial, the district court held Rodriguez liable for [a]ny amount up to $1 Million which the bankruptcy court may allow in the future under Chapter 7 liquidation proceedings to the casino workers illegally fired. Id. at 427. 41 Rodriguez raises a myriad of challenges to this surcharge, the most substantial of which is that the district court clearly erred in finding a deliberate breach of fiduciary duty. To support this, Rodriguez relies primarily on the lengthy opinion of an NLRB administrative law judge (ALJ) in which the hotel's liability was established. See San Juan Hotel Corp., No. 24-CA-4663 (NLRB Div. of Judges May 3, 1983), reprinted in Appendix at 97-145. 14 According to Rodriguez, the ALJ's opinion establishes that his decision to fire, while illegal, was a legitimately mistaken judgment call, not an intentionally wrongful act. The gist of the opinion, which is too long to completely summarize here, is that: (1) Rodriguez was justified in rejecting the contract with the casino workers, an action that had been authorized by the bankruptcy court; and (2) Rodriguez was justified in firing one worker for distributing certain leaflets--an event precipitating the strike--and in replacing workers once they went on strike; but (3) the casino workers had engaged in a protected strike over economic conditions and it was improper for Rodriguez to have discharged the striking workers before replacing them. The ALJ thus ordered the discharged workers reinstated and held the hotel liable for back pay. 42 Even were we to assume that all the ALJ's factual and legal findings were binding on the district court, we do not think that they establish clear error in the district court's finding. We see two major factors underlying the district court's conclusion to surcharge Rodriguez. First, Rodriguez delayed seeking rejection of the casino workers' agreement, and then, once rejection was sought and approval granted by the bankruptcy court, Rodriguez acted erratically and inconsistently in implementing the rejection. The evidence on this point is ample and convincing, coming from Kagan's testimony, from contemporaneous Kagan memoranda and, indeed, from the ALJ's opinion. For instance, the evidence shows that at a number of points after rejection, Rodriguez unilaterally imposed changes in the casino workers' hours, pay and benefits, only to change them again a few months later. These repeated and unpredictable changes fueled discontent and dissension among the workers and undoubtedly contributed to their decision to strike. 43 Second, there is evidence that Rodriguez was advised by his attorneys not to fire the casino workers, but ignored that advice and did so. 15 Such evidence, we think, not only shows that Rodriguez acted recklessly in disregard of the estate's well being, but also supports the inference that his actions were intentional. Importantly, neither of these points is in any way refuted by the ALJ's opinion, which only establishes that in some other respects Rodriguez's actions were proper, at least in terms of complying with applicable labor laws. We find no clear error in the district court's factual finding. 44 Rodriguez's remaining complaints about this surcharge relate to the form of contingent liability imposed by the district court. For instance, Rodriguez says that the establishment of a one million dollar ceiling on his liability is unacceptably speculative because it was based solely on Kagan's testimony that he did not know the exact amount of damages imposed by the NLRB, but thought it was in the millions. We acknowledge, as did the district court, that this damage estimate was somewhat speculative. But we also repeat what we have said earlier, namely, that Mosser surcharges may be estimated where the exact amount of damage cannot be calculated. Moreover, we think that Rodriguez is in no position to complain about the ceiling on his liability in the first place. Under the district court's ruling, Rodriguez will only be held liable for the amount of money that the estate actually pays out to the fired workers. To the extent that this liability does not reach one million dollars, the ceiling will be irrelevant to Rodriguez. To the extent the liability exceeds one million dollars, the ceiling will serve only to protect Rodriguez from an additional surcharge for which he might legitimately be held accountable. Thus, even if one million dollars is a wholly speculative and unsubstantiated figure, it can only work to harm the estate which may be forced to pay out more than it can recoup from Rodriguez. 45 For similar reasons, we reject Rodriguez's related complaint that this surcharge is too speculative because the hotel's back pay liability is joint and several with a union. Under the district court formula, Rodriguez will only be surcharged for the amount the hotel actually pays. The fact that a union might also have to pay a portion of the liability is irrelevant. 46 It is well-established that a judgment like this one, involving contingent liability, can be a proper, final and appealable one so long as it fixes [the defendant's] liability and clearly establishes the parameters of that liability. Hattersley v. Bollt, 512 F.2d 209, 213 (3d Cir.1975) (citing Gillespie v. United States Steel Corporation, 379 U.S. 148, 152, 85 S.Ct. 308, 311, 13 L.Ed.2d 199 (1964)); see also 9 J. Moore, B. Ward & J. Lucas, Moore's Federal Practice p 110.12 (2d ed. 1987 & Cum.Supp.1987-88). The district court's judgment fully complies with this standard, establishing Rodriguez's liability and setting forth a plain and easily administered formula for calculating the amount of that liability. 47 In a last ditch effort to prevent our affirming this surcharge, Rodriguez suggests that the district court's decision may not be final for another reason: although the opinion and order of the district court sets forth the surcharge, the actual judgment entered by the district court does not mention the contingent back pay liability. Rodriguez terms this a violation of Rule 58 of the Federal Rules of Civil Procedure, which mandates that [e]very judgment shall be set forth on a separate document. Here, Rodriguez says, there is no separate document declaring his liability for back pay. We are not convinced that there has been a violation of the separate judgment rule. 48 The relevant portion of the district court judgment, which indisputably appears on a separate document, reads: Based on the court's opinion and order entered today, judgment is hereby entered on behalf of [Lopez] and against [Rodriguez] in the amount of $3,434,081.82, plus costs. It is true, of course, that the judgment explicitly mentions the $3,434,081.82 attributable to the eleven immediately quantifiable surcharges, and not the contingent back pay liability. But this seems unimportant given that the judgment also references the opinion and order which does explicitly set out the back pay surcharge. Importantly, the opinion and order discusses the back pay surcharge in the same way the other eleven surcharges are discussed and, at the end of the order, summarizes the twelve in an indistinguishable manner, indicating that the court viewed all twelve surcharges as equally final. 49 Finally, even if there was a technical violation of Rule 58, the fact that both parties filed timely notices of appeal and that they have extensively argued this point on appeal demonstrates that neither was prejudiced by the violation; Rodriguez's right to claim a lack of compliance with Rule 58 therefore has been waived. See Bankers Trust Co. v. Mallis, 435 U.S. 381, 98 S.Ct. 1117, 55 L.Ed.2d 357 (1978); Harris v. McCarthy, 790 F.2d 753, 756-57 (9th Cir.1986); Diamond v. McKenzie, 770 F.2d 225, 230-31 (D.C.Cir.1985). The contingent surcharge for casino workers' back pay is affirmed. C. Unpaid Union Dues 50 The third surcharge imposed by the district court was $94,094 for unpaid union dues owed by the estate to Local 610 of the Gastronomical Workers Union. Under the collective bargaining agreement with Local 610, the hotel was obliged to deduct these union dues from member-employees' paychecks and then to turn them over to the union. But the district court found that Rodriguez was chronically late in paying over the dues, and that by February of 1982 he stopped paying altogether. Moreover, Rodriguez failed to return phone calls from the union inquiring about the payments and also failed to turn over required payroll records to the union. Finding that Rodriguez breached his fiduciary duty by these actions, the district court held him liable for the total unpaid dues. 51 On appeal, Rodriguez does not challenge the factual findings by the district court underlying this item, but asserts that the estate suffered no loss as a result of his actions. Only the union itself has been harmed, he says, because it did not receive the dues to which it was entitled. Reluctantly we agree. Although the impropriety of Rodriguez's actions seems plain enough, the district court's opinion also makes it clear that the harm underlying this surcharge was harm to the union, not the estate: The Gastronomical Workers Union, Local 610, was also seriously affected by the trustee's failure to report or by the concealment of material information. The Union's pension fund lost $94,094 in dues. 71 B.R. at 422. But the union is not a party to this action, and neither the district court nor Lopez has articulated any way in which Rodriguez's failure to pay has harmed the estate. 16 Nor has it been established that Rodriguez or anyone under his control personally profited from the unpaid dues. 52 If anything, the evidence shows that the estate benefitted, albeit illegitimately, by remaining in possession of the $94,094. Even if the union eventually is able, through the liquidation proceedings, to collect from the estate the full $94,094 it is owed, the estate will be no worse off than if Rodriguez himself had paid the union the money. And for us to have Rodriguez now throw another $94,094 into the estate, which would then be divided among all creditors, would only marginally benefit the union, if at all. As we discussed in Part II.A. supra, the only proper course by which the union can seek to be made whole is a direct action against Rodriguez. The surcharge of $94,094 for unpaid union dues must be reversed. D. Local Taxes 53 Union dues were not, alas, the only debts of the estate that went unpaid. The district court also received evidence that Rodriguez deliberately failed to pay taxes, both Commonwealth and federal. With respect to Commonwealth taxes, the court found not only that Rodroguez failed to pay almost two million dollars in employee's withholding tax, personal property tax and excise tax, but also that he entered into a tax exemption and payment plan with the Commonwealth when he knew the estate could not comply with it. 71 B.R. at 422. The court surcharged Rodriguez for $461,353.66, representing interest and penalties incurred by the estate as a result of the failure to pay. 54 In this respect, the district court complied with the normal rule for trustee surcharges: 55 The trustee has the affirmative duty of seeking out and paying all taxes accruing against the estate during bankruptcy; if he fails to do so, having sufficient funds in hand to pay them, and thus subjecting the estate to interest and penalties, he may be surcharged to the extent of the interest and penalties. 56 4 Collier, supra, p 704.04, at 704-11 to 12. Rodriguez does not challenge this legal proposition, but does argue that the district court's factual finding was, for a number of reasons, clearly erroneous. 57 The relevant trial evidence on unpaid Commonwealth taxes was provided by Ruth Fonseca Benitez (Fonseca), an employee of the Puerto Rico Department of Treasury who had monitored the San Juan Hotel's taxes. Referring to a January 29, 1987 Department of Treasury certification, Fonseca summarized the estate's tax liability as follows: Principal Owed Interest Penalty 58 Income Withholding Tax $ 772,941.86 $221,993.37 $ 73,094.50 59 Personal Property Tax 156,470.01 52,725.02 14,090.28 60 Excise Tax 353,525.13 60,533.31 38,917.18 61 -------------- ----------- ----------- 62 Total $1,282,937.00 $335,251.70 $126,101.96