Opinion ID: 507087
Heading Depth: 2
Heading Rank: 1

Heading: The Meaning of Necessary in Sec. 1113.

Text: 16 The term necessary appears twice in Sec. 1113. It requires the pre-rejection proposal to contain only necessary modifications, and that the proposal be necessary to permit the reorganization of the debtor. 11 U.S.C. Sec. 1113(b)(1)(A). We have interpreted the necessity requirement of Sec. 1113 as placing upon a debtor the burden of proving that its proposal is made in good faith, and that it contains necessary, but not absolutely minimal, changes that will enable the debtor to complete the reorganization process successfully. Carey Transportation, 816 F.2d at 90 (emphasis added). That the approach followed by the bankruptcy court below was consistent with the one later adopted by this court in Carey Transportation is at least indicated by the fact that Judge Altimari's opinion quotes, fairly extensively and approvingly, from Judge Abram's opinion in the instant case. See id. at 89-90. 17 This conclusion is buttressed by the general inconsistency between holding, as we did in Carey Transportation, that the debtor's proposal need not be limited to absolutely minimal modifications, and holding, as the union would now have us do, that each and every vital element of the debtor's proposal must be shown independently to be necessary. At the least, focusing on a particular element vital to the proposal when the union does not bargain to change that element, rather than on the necessity for the package taken in toto, would undermine the interpretation of Sec. 1113 articulated in Carey Transportation. 18 At first blush, there seems to be some merit to the union's contention. If a particular element of the debtor's proposal is not needed, the proposal would seem not to be limited to necessary modifications--by definition, it would include an unnecessary modification. 19 Under that tautological reading of the statute, however, no proposal could ever truly be necessary, since any single vital element of a proposal can hardly be necessary if it can be replaced by some alternative not included in the package which would achieve the same dollar savings for the debtor. Or, the union, as here, could argue that a specific element could substantially be modified, rather than eliminated, to achieve virtually the same savings and the same likelihood of a successful reorganization. In other words, the union's construction of the statute would enable it to play hit-and-run: refusing to negotiate toward a compromise, safe in the knowledge that it will almost certainly be able to defeat a rejection application by attacking some vital modification by saying that it cannot be necessary if reasonable substitutes could have been offered. See Royal Composing Room, 62 B.R. at 407 ([T]he rejection process becomes a game of Russian roulette in which the union will stand mute during negotiations in the expectation that the court is apt to find some aspect of the debtor's proposal unnecessary   .). 20 This is not to say that the union is always necessarily bound by the particular elements chosen by the debtor. If the debtor proposes an element objectionable to the union, the union has two options under Sec. 1113. It can argue that the part of the proposal it cannot accept was included by the employer in bad faith, in an effort to stalemate negotiations and allow it to obtain outright rejection rather than a negotiated compromise. If the union can make such a showing, the debtor would not be entitled to reject the labor contract under Carey Transportation, 816 F.2d at 90. The union attempted here to make such a showing in the bankruptcy court, see Royal Composing Room, 62 B.R. at 411, but the court explicitly rejected the argument, and the union does not challenge this finding as clearly erroneous. 21 Alternatively, the union can negotiate with the debtor. Although this is plainly what congress was seeking to encourage when it passed Sec. 1113, see id. at 405-06 (reviewing legislative history); In re Mile Hi Systems, Inc., 51 B.R. 509 (Bkrtcy.Colo.1985), rev'd on other grounds, 67 B.R. 114 (D.Colo.1986), it is apparent from Judge Abram's opinion below that this alternative was for some reason unacceptable to Local 607. If the union believes that a vital part of the proposal is unacceptable, it should enter into good faith negotiations aimed at moderating that element, or at substituting a measure less offensive to the union but achieving comparable savings for the debtor. 22 But, in this case, the union refused even to discuss the issue. Not only did the union take the position that priority was nonnegotiable; it went still further and refused to negotiate at all until priority was taken out of Royal's proposal. Id. at 410. 23 A union certainly is entitled to adopt a hard-line position, but if, as in this case, the union does so, it must recognize the risk inherent in the strategy. The balance of the equities nearly always will tip in favor of the party that seeks to reach a compromise and to that end negotiates in good faith. 11 U.S.C. Sec. 1113(c)(3). This is particularly true where, as here, the debtor not only seeks to negotiate in good faith, but also has adopted numerous cost-saving measures to try to improve the situation before declaring bankruptcy and seeking concessions from the union. See Royal Composing Room, 62 B.R. at 412 (Union labor cost, Royal's single largest expense, is the only expense that has not been cut in the last four years.); In re Royal Composing Room, 78 B.R. 671, 672 (S.D.N.Y.1987) (As of the end of 1985, Local 6 had not yet made any sacrifices or concessions.). Cf. In re Kentucky Truck Sales, 52 B.R. 797, 799 (Bkrtcy.W.D.Ky.1985) (crediting as important testimony that the debtor has already made nearly all possible cost cuts in the nonlabor areas of its operation). Moreover, the rejection of the proposal by the union in such circumstances will almost always without exception be without good cause, another prerequisite to the debtor obtaining rejection of the contract. 11 U.S.C. Sec. 1113(c)(2). 24 Put simply, where a union refuses to negotiate in order to obtain a different combination of modifications, it may not challenge the particular combination, or any vital element, contained in the debtor's proposal. So long as the total quantum of savings is necessary under the Carey Transportation standard, the union may not prevent rejection by belatedly attacking a specific element. 25 In terms of Sec. 1113, the burden on the parties to negotiate is best analyzed under Sec. 1113(c)(2), which permits rejection of the agreement only if the union has rejected the debtor's proposal without good cause. If the union seeks to negotiate compromises that meet its needs while preserving the debtor's required savings, it would be unlikely that its rejection of the proposal could be found to be lacking good cause. If, on the other hand, the union refuses to compromise, it is as unlikely it could be found to have acted with good cause. 26 Thus, the union here must stand or fall on the overall necessity of Royal's proposal. There is, however, no doubt that the district court's finding that Royal requires the full measure of savings represented in its proposal--and perhaps more--is not clearly erroneous. The total savings projected by Royal from its pre-rejection proposal was $4,000,778, for the years 1986-1989. See Royal Composing Room, 62 B.R. at 414. This amount was less than its projected losses operating under the union contract. Id. It may be true that the same goal might have been reached via a different route, had the union been willing to point the way it preferred. But Royal's chosen route was found to have been offered in good faith, and to cover the necessary, if not absolutely minimal, distance Royal had to travel. No more is necessary to justify rejection under Sec. 1113, as interpreted by Carey Transportation. 27