Court Opinion

ID: 2999895
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:58:51.810042+00
Date Added: 2024-06-11T12:25:14.410244
License: Public Domain

In the
 United States Court of Appeals
                For the Seventh Circuit
                           ____________

No. 06-2780
IN RE:
    UAL CORPORATION, et al.,
    Reorganized Debtors.

APPEAL OF:
    UNITED RETIRED PILOTS BENEFIT
    PROTECTION ASSOCIATION.
                     ____________
              Appeal from the United States District Court
         for the Northern District of Illinois, Eastern Division.
                 No. 06 C 844—John W. Darrah, Judge.
                           ____________
   ARGUED SEPTEMBER 26, 2006—DECIDED OCTOBER 25, 2006
                           ____________

  Before BAUER, POSNER, and EASTERBROOK, Circuit Judges.
  POSNER, Circuit Judge. United Airlines and its affiliates
(“United” for short) declared bankruptcy in December 2002,
and in January 2006 the bankruptcy court in Chicago
entered a final order confirming a plan of reorganiza-
tion under Chapter 11. An association of retired United
pilots appealed the order to the district court, which dis-
missed the appeal on the ground that it was unripe. In re
UAL Corp., No. 06 C 844 (N.D. Ill. June 22, 2006). The
2                                                No. 06-2780

association (which we’ll refer to as the “retired pilots”)
appeals the dismissal.
  The background to this offshoot of United’s Chapter 11
proceeding is described in our decision of last March in In re
UAL Corp. (URPBPA), 443 F.3d 565 (7th Cir. 2006),
which we’ll call URPBPA I and summarize briefly before
moving to the particulars of the present case. United had
a collective bargaining agreement with its pilots’ union,
the Air Line Pilots Association (ALPA), that among other
things established a defined-benefit pension plan for both
active and retired United pilots. Sometime after entering
Chapter 11 bankruptcy, United invoked section 1113 of
the Bankruptcy Code, which permits the debtor to repudiate
the unexecuted portion of a collective bargaining agreement
with the approval of the bankruptcy judge after negotiations
between the debtor and the union aimed at modifying the
agreement. When ALPA made clear that it would not
represent the interests of the retired pilots in the negotia-
tions, the latter moved the bankruptcy judge to appoint a
representative to participate in the negotiations on their
behalf. The judge refused, and as a result the retired pilots
did not participate in the negotiations. We upheld the
judge’s refusal.
  The negotiations resulted in an agreement (called the
“Letter Agreement”) to modify the collective bargaining
agreement by eliminating the defined-benefit pension plan
but compensating the active pilots with replacement
benefits consisting of convertible notes valued at $550
million and other consideration, including a defined-
contribution pension plan. In return, the union agreed not
to oppose United’s terminating the existing pension plan.
United asked the bankruptcy judge to approve the Letter
Agreement, pursuant to section 363(b)(1) of the Bankruptcy
No. 06-2780                                                 3

Code, which requires the bankruptcy judge’s approval
for contracts made by the debtor that are outside the
ordinary course of business, as the Letter Agreement
obviously was. See 11 U.S.C. § 1108. The judge gave his
approval over the objection of the retired pilots, who again
maintained that he should have allowed them to participate
in the negotiations; such participation might, they argued,
have resulted in their receiving replacement benefits too.
But, also in URPBPA I, we approved the judge’s action.
  As matters developed, United did not press for volun-
tary termination of the pilots’ pension plan. Instead the
Pension Benefit Guaranty Corporation, which insures vested
rights created by ERISA pension plans, 29 U.S.C. § 1322(a);
Pension Benefit Guaranty Corp. v. LTV Corp., 496 U.S. 633,
637-38 (1990), moved under 29 U.S.C. § 1342 for involuntary
termination of the plan. PBGC feared that the plan, if
it wasn’t terminated and so continued generating new
vested pension rights, would go into default and as the
insurer PBGC would face a staggering liability. The district
court granted PBGC’s application in an order that we affirm
today. In re UAL Corp., No. 06-2662 (7th Cir. Oct. 25, 2006).
  The collective bargaining agreement had granted the
pilots supplemental retirement benefits, which PBGC does
not insure. The termination of the pension plan extinguished
the claims against United that the pilots derived from the
plan, replacing them with insurance claims against PBGC.
But the supplemental benefits remained as unsecured claims
against the debtor’s estate, along with medical benefits to
which other agreements, also terminated by United, entitled
them. The active pilots gave up what would have been their
unsecured claims to these benefits in exchange for the
replacement benefits; the retired pilots did not, because they
got no replacement benefits.
4                                                 No. 06-2780

  In upholding the bankruptcy judge’s approval of the
Letter Agreement, we noted in URPBPA I that even if
the retired pilots had been parties to the negotiations that
resulted in the agreement, they would have been bound
to receive less in the way of replacement benefits than the
active pilots and indeed might well have received nothing.
They lost less from the termination of the pension plan,
because 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. The active pilots also had a stick to use against
United—the threat of a strike—that the retirees didn’t have,
and besides surrendering the stick they agreed to substantial
salary cuts, a concession that retired pilots could not offer.
Such differences justify different treatment of creditors in
bankruptcy. In re Wabash Valley Power Ass’n, 72 F.3d 1305,
1321 (7th Cir. 1995); In re Dow Corning Corp., 280 F.3d 648,
661 (6th Cir. 2002); In re Briscoe Enterprises, Inc., 994 F.2d
1160, 1167 (5th Cir. 1993); In re U.S. Truck Co., 800 F.2d 581,
582-87 (6th Cir. 1986). But the retired pilots received not
merely lower replacement benefits than the active pilots;
they received no replacement benefits.
  They had no right to anything, however, as we explained
in URPBPA I. Parties to a contract are always free to modify
their contract without considering the views of third parties,
and United and ALPA were the only parties to the collective
bargaining agreement. A union’s duty to bargain collec-
tively 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). And only
“interested parties” may participate in a hearing on the
No. 06-2780                                                  5

debtor’s proposal to reject a collective bargaining agree-
ment, 11 U.S.C. § 1113(d)(1), which means only the parties
to the agreement or a guarantor of it, In re UAL Corp. (IFS),
408 F.3d 847, 851 (7th Cir. 2005), and thus excluded the
retired pilots. Since, however, the rejection of the collective
bargaining agreement had to be approved by the bank-
ruptcy judge, it is possible that had the retired pilots been
parties to the negotiations leading up to the Letter Agree-
ment they would have been able to extract something from
United in exchange for agreeing not to oppose the termina-
tion of the pension plans. They might, in short, have
obtained some modest replacement benefits of their own.
Even if, as we doubted (because had United wanted to do
business with the retired pilots it could have done so
whether or not they were formally represented in the
negotiations), this possibility should have led the bank-
ruptcy judge to require that the retired pilots be admitted to
the negotiations that resulted in the Letter Agreement, we
thought it far too late to rescind the agreement and send the
parties back to square one. And we thought it wholly
unrealistic to remand the case to the bankruptcy judge for
him to determine what he would have insisted that the
retired pilots receive in the agreement as a condition of his
approving it. There would be no objective basis for calculat-
ing what the retired pilots might have received in a hypo-
thetical negotiation for giving up their opposition and what,
therefore, the bankruptcy judge might reasonably have
insisted that they receive as a condition of his approval.
  All this is by way of background, but indispensable
background, to the present controversy. Remember that
the retired pilots’ claims to pension benefits insured by
PBGC were transmuted into claims against PBGC, but that
their claims to supplemental benefits (also to certain medical
benefits) survived as unsecured claims in the bankruptcy
6                                                No. 06-2780

proceeding. In the plan of reorganization adopted by the
bankruptcy court last January, these claims were placed in
a separate class from the claims of United’s other unsecured
creditors. The plan provided that this class would receive
between 4 and 8 cents on the dollar. The parties, illustrating
lawyers’ typical insouciance about quantification, have not
told us what the retired pilots’ unsecured claims are likely
to be worth. But URPBPA’s estimate is that its members’
supplemental benefits amount to $340 million, and since
roughly 57 percent of the retired pilots belong to URPBPA,
the total supplemental benefits are probably around $600
million, implying a payout range between $24 and $48
million. The plan of reorganization also incorporated the
terms of the Letter Agreement, which gave the active pilots
upwards (how far upwards has never been calculated) of
$550 million, and their right to that money is preserved in
the settlement agreement between United and PBGC. The
difference between the payouts to the two groups of pilots
is an order of magnitude, though this is misleading since the
active pilots made substantial salary concessions in ex-
change for their $550 million in notes. (Of course, with-
out the concessions, United might have liquidated, leav-
ing the pilots with no salaries.)
  The retired pilots claim that they are entitled to benefits
proportionately equal to those of the active pilots, and since
retired pilots had entitlements to two-thirds of the pension
benefits when the plans were terminated, they want the plan
of reorganization revised to give them more than $1 billion.
The bankruptcy judge turned them down, and they ap-
pealed to the district court, which dismissed the appeal (in
three sentences) as “unripe” because, the district judge
erroneously believed, the pension plans had not yet been
terminated. Quite apart from his error, there is no doctrine
of appellate “ripeness.” “Finality, not ripeness, is the
No. 06-2780                                                   7

doctrine governing appeals from district court to court of
appeals.” United States v. Jose, 519 U.S. 54, 57 (1996) (per
curiam). Of course events after a notice of appeal is filed can
affect the appeal—for example by rendering it moot. E.g.,
Church of Scientology v. United States, 506 U.S. 9, 12 (1992);
Diffenderfer v. Central Baptist Church, 404 U.S. 412, 414-15
(1972); Golden v. Zwickler, 394 U.S. 103, 108-10 (1969). But the
filing of the appeal cannot be delayed beyond the time
(usually 30 days, but 10 days in a bankruptcy case, Fed. R.
Bankr. P. 8002(a), though extensions are possible, Fed. R.
Bankr. P. 8002(c)) specified for appealing just because,
though the order to be appealed from is final, the appellate
court’s consideration might be better informed or yield a
more definitive result if the appeal could be delayed. United
States v. Jose, supra. The appellate court can, if need be, stay
appellate proceedings; that is common. But it would be
chaos if the filing of the appeal could be delayed indefinitely
by “ripeness” considerations; it would lead to endless
disputes over the timeliness of appeals. But rather than send
the case back to the district court for review on the merits,
we shall skip that stage and resolve the merits, which have
been fully briefed by the parties, ourselves. E.g., In re UAL
Corp., 411 F.3d 818, 821 (7th Cir. 2005); Ross v. Marshall, 426
F.3d 745, 761 n. 68 (5th Cir. 2005); Tilley v. TJX Companies,
Inc., 345 F.3d 34, 39 (1st Cir. 2003).
  The retired pilots’ claim is fantastic, as should be apparent
from our narrative. It also comes too late. The reorganiza-
tion has been carried into effect, and no stay was sought or
granted. It is true that the financial institutions that pro-
vided United with the money it needed to emerge from
bankruptcy as a going concern were on notice of the retired
pilots’ challenge, and that they could in principle have
protected themselves in advance from the possibility that
the challenge would burden the reorganized corporation
8                                                 No. 06-2780

with a further $1 billion or more debt by charging higher
interest rates. But the higher those rates, the less likely the
reorganization would be to succeed. And predicting the
outcome of litigation is very difficult. Therefore institutions
that engage in the inherently risky practice of “exit” financ-
ing of Chapter 11 bankrupts should have reasonable
assurance that once approved the plan of reorganization
will not, unless stayed, be rescinded or modified in order to
accommodate a very large, very late-appearing debtor, as
the retired pilots would be if they succeeded in this appeal.
Although the plan of reorganization is based in part on a
business model in which United emerges from bankruptcy
with a $1.35 billion equity cushion (that is, a value $1.35
billion greater than the aggregate value of the securities
issued to its creditors), the company remains fragile and a
$1 billion hit could send it spinning, to the detriment of the
creditors who consented to the plan.
   No exact rule can be laid down to govern challenges to an
approved plan of reorganization. A sensible result depends
on the strength of the late-appearing debtor’s claim, its size
relative to the debtor’s assets, the reason a stay was denied
or not sought, how far the plan of reorganization has been
executed, and whether the claim can be satisfied by reduc-
ing the claim of creditors who had not provided exit
financing. In re UNR Industries, Inc. 20 F.3d 766 (7th Cir.
1994); In re Andreuccetti, 975 F.2d 413, 415, 417-19 (7th Cir.
1992); In re U.S. Airways Group, Inc., 369 F.3d 806 (4th Cir.
2004); In re U.S. Brass Corp., 169 F.3d 957 (5th Cir. 1999); In
re Continental Airlines, 91 F.3d 553 (3d Cir. 1996) (en banc).
Despite the size of the retired pilots’ claim, they have made
no effort to explore and perhaps dispel the obvious difficul-
ties with granting relief at this stage.
  In any event, as we said, the claim is fantastic. It is true
that arbitrary differences in the treatment of creditors in
No. 06-2780                                                   9

bankruptcy are improper. So when creditors are placed
in separate classes in the sense of receiving different per-
centages of their claims, the differences in treatment must be
justified. In re Boston Post Road Limited Partnership, 21 F.3d
477, 478-79, 481-83 (2d Cir. 1994); In re Bryson Properties,
XVIII, 961 F.2d 496, 502 (4th Cir. 1992); In re Greystone III
Joint Venture, 995 F.2d 1274, 1280-81 (5th Cir. 1991). And the
fact that the active pilots’ “take” from the reorganization
comes in the form of approval of the Letter Agreement
rather than placing them in a favored class of unsecured
creditors could be disregarded as a merely formal matter.
Cf. In re Spong, 661 F.2d 6, 9-10 (2d Cir. 1981). But to suggest
that the retired pilots are entitled to parity with the active
ones is to seek a belated reargument of our decision in
URPBPA I. The bankruptcy judge approved the deal that
gave the active pilots $550 million plus (but also and
critically minus, because of the salary cuts that the pilots
accepted) in exchange for surrendering the leverage that
they enjoyed—United needs pilots to fly its planes. The
retired pilots, alas, did not have any leverage at all, or at
least so little that, as we said in our previous opinion, no ob-
jective quantification was possible. We said that more than
six months ago, and if we were wrong the retired pilots
have had plenty of time in which to generate some plausi-
ble, and at least minimally objective, estimate of what
they might have obtained in the way of replacement benefits
had they been admitted to the negotiations. In the present
state of the record the best answer is zero.
  They argue separately that the plan should not have
included a clause exculpating ALPA for liability for acts
done in relation to the reorganization, notably negotiat-
ing the Letter Agreement with no regard for the interests
of the retired pilots. But as ALPA had no legal duty to the
retired pilots (as we explained in our previous opinion,
10                                              No. 06-2780

and repeated briefly in this one), there is no wrong to be
excused; the validity of the clause is academic.
  The district court’s dismissal of the appeal from the
bankruptcy court is vacated and the bankruptcy court’s
order approving the plan of reorganization is remanded
to the district court with instructions to affirm it.

A true Copy:
       Teste:

                         _____________________________
                          Clerk of the United States Court of
                            Appeals for the Seventh Circuit

                  USCA-02-C-0072—10-25-06