Court Opinion

ID: 2964222
Source: CourtListenerOpinion
Date Created: 2015-09-21 21:22:22.99964+00
Date Added: 2024-06-11T11:42:52.707058
License: Public Domain

USCA1 Opinion

	

                            United States Court of Appeals
                                For the First Circuit
                                 ____________________

        No. 96-1010

                      UNITED FOOD AND COMMERCIAL WORKERS UNION, 
                                 LOCAL 328, AFL-CIO,

                                 Plaintiff-Appellant,

                                          v.

                                ALMAC'S INC., et al.,

                                Defendants-Appellees.

                                 ____________________

                     APPEAL FROM THE UNITED STATES DISTRICT COURT

                           FOR THE DISTRICT OF RHODE ISLAND

                       [Hon. Mary M. Lisi, U.S. District Judge]
                                           ___________________

                                 ____________________

                                        Before

                                 Lynch, Circuit Judge,
                                        _____________

                            Coffin, Senior Circuit Judge,
                                    ____________________

                            and Cummings,* Circuit Judge.
                                           _____________

                                 ____________________

            Warren  H.  Pyle,  with  whom Angoff,  Goldman,  Manning,  Pyle  &
            ________________              ____________________________________
        Wanger, P.C. was on brief, for appellant.
        ____________
            Joel  D. Applebaum, with  whom Pepper,  Hamilton &  Scheetz was on
            __________________             ____________________________
        brief, for appellee.

                                 ____________________

                                    July 24, 1996
                                 ____________________

                            
        ____________________

        *Of the Seventh Circuit, sitting by designation.

                  LYNCH, Circuit  Judge.  This  case raises  an important
                  LYNCH, Circuit  Judge.
                         ______________

            issue  at  the intersection  of  federal  bankruptcy law  and

            federal labor policy.   Almac's, Inc., a  New England grocery

            store chain that employed over 3000 people petitioned in 1993

            for reorganization  under Chapter 11 of  the Bankruptcy Code,

            11 U.S.C.    1101 et  seq.  Over  the objection of  the union
                              ________

            representing the employees, the  bankruptcy court in a series

            of emergency interim orders allowed the debtor  to reduce the

            employees' wages  by nine  to fifteen  percent  for almost  a

            year.   The employees claim  to have lost  over $9,630,000 in

            wages, but  these  emergency  interim  modifications  to  the

            collective  bargaining  agreement  permitted the  company  to

            survive  and  ultimately  to   reorganize  into  a  successor

            company.   The union  ultimately agreed  to a  new collective

            bargaining  agreement with  the  successor company.   But  it

            sought  the   $9,630,000  lost  in  the   interim  in  wages,

            characterizing  the  interim  modifications  as   a  "partial

            rejection"   of  an   executory   contract  (the   bargaining

            agreement)  within the meaning of  11 U.S.C.   365.   We hold

            that   Congress  did   not  intend   for  emergency   interim

            modifications ordered under 11 U.S.C.   1113(e) to be treated

            as  "rejections"  of  the  collective  bargaining  agreement.

            Accordingly, the union and its  members are not entitled here

            to their lost wages and we affirm.

                                         -2-
                                         -2-

                                          I

                  Local 328,United Food and CommercialWorkers Union, AFL-

            CIO ("Local  328") and Almac's, Inc.  ("Almacs") were parties

            to a collective bargaining agreement covering the period June

            7, 1993 to  June 1,  1996 (the "Agreement").   The  Agreement

            delineated  the   wages,  benefits,   and  other   terms  and

            conditions  of  employment for  approximately  three thousand

            Almacs  employees  in Rhode  Island  and  Massachusetts.   On

            August 6, 1993, shortly after the Agreement went into effect,

            Almacs petitioned for reorganization  under Chapter 11 of the

            Bankruptcy Code.   In October 1993, after reducing  the wages

            and benefits of unrepresented  employees, Almacs moved  under

            section  1113(e) to  implement interim  modifications to  the

            wages and benefits of employees covered by the Agreement.

                  The  bankruptcy   court  found   that  "the   requested

            modifications [were]  not  only essential  to  the  continued

            operations  of Almac's,  but [were]  vital to  any hope  of a

            successful reorganization."   It granted Almacs'  request for

            both  a  fifteen  percent  reduction  in  the  wages  of  all

            employees covered by  the Agreement and a reduction  in wages

            and benefits for  employees who had been  downgraded to part-

            time  positions.   This  modification  was  effective through

            December 31, 1993.

                  Almacs  requested  and received  consecutive extensions

            to  the modification,  although  the court  reduced the  wage

                                         -3-
                                         -3-

            modification from fifteen percent  to twelve percent and then

            to nine percent of the wages originally in effect.  The court

            periodically   granted    modifications   effective   through

            September 30,  1994.  Throughout this time  period, Local 328

            and Almacs were involved in negotiations over the fate of the

            Agreement.   Almacs never filed an  application under section

            1113(b) to reject the Agreement.

                  Following  each modification  order, Local  328 and two

            employees, as class representatives for the Almacs employees,

            filed claims for the difference between the modified wage and

            benefit  rates and those  provided under the  Agreement.  The

            total amount  ultimately claimed  was "at least  $9,630,000."

            Although from the  face of  the claims it  appears that  they

            were  initially  pressed  as  administrative  expense claims,

            Local  328  later  agreed  to  assert  them  only as  general

            unsecured claims.  Local  328 does not now purport  to assert

            an administrative claim.

                  Almacs objected  to the  claims of  Local  328 and  the

            class representatives.  After a hearing  on October 21, 1994,

            the bankruptcy court sustained Almacs' objections.  Local 328

            and the  employee claimants appealed to  the district court.1

                                
            ____________________

            1.  After Local 328  filed the  notice of appeal,  a plan  of
            reorganization was  ratified by the creditor  groups and then
            approved  by the bankruptcy court on November 8, 1994.  Under
            the  plan, Almacs'  assets would  be sold  to a  newly formed
            company, New Almac's, Inc. ("New Almacs").  New  Almacs would
            continue  to operate Almacs' business.  Local 328 had entered
            into a  new collective  bargaining agreement with  New Almacs

                                         -4-
                                         -4-

            The district  court affirmed,  reasoning that the  only basis

            for  recognizing   a   claim  would   require   viewing   the

            modifications to  the Agreement  as amounting to  a rejection

            and hence  a breach  of  an executory  contract, but  because

            interim   wage  modifications   under  section   1113(e)  are

            "judicially sanctioned,  no breach occurs, and,  as a result,

            no viable claim arises."2   Local 328 has appealed  from that

            decision.

                                          II

                  The bankruptcy court's order  is subject to independent

            review  here, and we accept  all bankruptcy court findings of

            fact unless "clearly erroneous" and review rulings  of law de
                                                                       __

            novo.  In re  LaRoche, 969 F.2d 1299,  1301 (1st Cir.  1992).
            ____   ______________

            Because  there  was no  appeal  from  the bankruptcy  court's

            interim  orders, we accept  that court's findings  of fact in

                                
            ____________________

            which   took   effect   upon   approval  of   the   plan   of
            reorganization.
                  In  connection  with  the  approval   of  the  plan  of
            reorganization,  Local  328  and  Almacs  stipulated  to  the
            rejection  of the  (original) Agreement  by Almacs.   In  the
            stipulation, Local 328 waived any claim  for damages based on
            this consensual rejection of the Agreement, but preserved the
            issue raised in this  appeal.  No petition for  rejection was
            submitted to the court.

            2.  The district  court also reasoned that  Local 328's claim
            could  not  be sustained  because it  would  have to  be paid
            before  a  plan of  reorganization  could  be approved  under
            section  1129(a)(9)(A), thus  putting  the  employer  into  a
            Catch-22  situation.    Both parties  agree  that  this is  a
            correct   statement  of   the  law   only  with   respect  to
            administrative expense claims.   Local 328 does not  argue on
            appeal that it has an administrative claim.

                                         -5-
                                         -5-

            support of  those orders as  final and  deem there  to be  no

            questions   about  whether  those   orders  were   issued  in

            conformance with  the statute  or about  the duration  of the

            emergency conditions.

                  At  the outset,  it is  important to  note the  precise

            nature of Local 328's claim.  Local 328 argues on appeal that

            it   has   a   general   unsecured  claim,   based   on   the

            characterization of  the  interim modifications  as  "partial

            rejections" of the Agreement.  Local 328 does not assert here
                                                          ___

            a  claim for  administrative expenses  under section  503 for

            wages  for post-petition work.   Nor does Local  328 assert a

            claim  based on  the  consensual rejection  of the  Agreement

            while  its  appeal  of  this  issue  was  pending  before the

            district court.  Finally,  Local 328 does not argue  that the

            bankruptcy  court  lacked  authority  to  order  the  interim

            modifications.

                                         III

                  A brief  review of  the context  in which section  1113

            was enacted is helpful to understand Local 328's  argument on

            appeal.   Under section 365 of the Bankruptcy Code, a trustee

            (or  the  debtor-in-possession) has  the  choice, subject  to

            court approval, of either  assuming or rejecting an executory

            contract.     The   rejection   of   an  executory   contract

            "constitutes  a breach  of such  contract  . .  . immediately

            before the date of the filing  of the petition."  11 U.S.C.  

                                         -6-
                                         -6-

            365(g)(1).    In 1984,  the Supreme  Court issued  a decision

            interpreting  section  365,  one  portion  of which  prompted

            Congress  to enact section 1113  of the Bankruptcy  Code.  In

            NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1984), the Supreme
            ____    ___________________

            Court   held  that  collective   bargaining  agreements  were

            executory contracts for purposes of section 365, but that due

            to  the special nature of such agreements, the rejection of a

            collective  bargaining  agreement  should  be governed  by  a

            standard more strict than  that applicable to other kinds  of

            contracts.   See id. at 522 &  n.6, 526.  The Court suggested
                         ___ ___

            that the rejection of a collective bargaining agreement would

            result in  a general  unsecured claim against  the bankruptcy

            estate.  Id. at 530-31 & n.12; see also In re Continental Air
                     ___                   ________ _____________________

            Lines  Corp., 901  F.2d 1259,  1265 (5th  Cir. 1990).   These
            ____________

            holdings  were not  what motivated  the enactment  of section

            1113.

                  Congress's primary  concern  in enacting  section  1113

            was with one  of the  Court's other holdings  in Bildisco  --
                                                             ________

            that  a debtor  did not  commit an  unfair labor  practice by

            making  unilateral changes  to  the terms  and conditions  of

            employment,   prior  to   formally  rejecting   a  collective

            bargaining  agreement,  because the  agreement was  no longer

            enforceable upon  the filing of  a bankruptcy petition.   465

            U.S. at  534.  Under  section 1113,  a collective  bargaining

            agreement remains in effect after the filing of a petition in

                                         -7-
                                         -7-

            bankruptcy.  A trustee may not make unilateral changes in the

            terms or  conditions  of a  collective  bargaining  agreement

            unless  the  court  fails  to  rule  on  an  application  for

            rejection  within the  required  time  frame.   11  U.S.C.   

            1113(d)(2) & (f).

                  Congress recognized  in enacting  section 1113(e)  that

            on occasion a  debtor may require  emergency relief from  the

            collective   bargaining   agreement   prior   to   rejection,

            assumption  or  agreed-upon  modification of  the  agreement.

            Section 1113(e) thus provides:

                  If   during   a   period   when  the   collective
                  bargaining agreement  continues in effect, and if
                  essential  to the  continuation  of the  debtor's
                  business,  or  in  order  to  avoid   irreparable
                  damage  to the  estate, the  court, after  notice
                  and  a  hearing,  may  authorize  the trustee  to
                  implement   interim   changes   in   the   terms,
                  conditions,   wages,  benefits,   or  work  rules
                  provided  by  a collective  bargaining agreement.
                  Any  hearing   under  this   paragraph  shall  be
                  scheduled in  accordance  with the  needs of  the
                  trustee.    The implementation  of  such  interim
                  changes  shall  not  render  the application  for
                  rejection moot.

            11  U.S.C.    1113(e).3   Local 328  claims that  the interim

                                
            ____________________

            3.  The other provisions of section 1113 codify the standards
            that must be met before a collective bargaining agreement may
            be rejected.    In  Bildisco, the  Supreme  Court  held  that
                                ________
            rejection of a collective bargaining agreement was  permitted
            if  the  "debtor  can  show  that  the  collective-bargaining
            agreement  burdens  the   estate,  and  that   after  careful
            scrutiny,  the equities  balance  in favor  of rejecting  the
            labor contract."   465 U.S. at 526.  The Court also held that
            "[b]efore  acting  on  a  petition  to  modify  or  reject  a
            collective-bargaining agreement  . .  . the  Bankruptcy Court
            should be  persuaded that  reasonable efforts to  negotiate a
            voluntary  modification have been made  and are not likely to

                                         -8-
                                         -8-

            modifications permitted  by the statute should  be treated as

            partial  rejections of  the collective  bargaining agreement.

            From  this, it  argues it  is entitled  to rejection  damages

            under section 365.

                  We note first that  even were we to accept  Local 328's

            premise that  the interim modifications constitute  a partial

            rejection,  section  1113,  which governs  the  rejection  of

            collective bargaining agreements, is silent as to  how such a

            rejection  should be  treated  under section  365.4   Indeed,

            courts  have  divided over  whether  a claim  for  damages is

            permitted  at  all  after   the  rejection  of  a  collective

            bargaining  agreement under  section  1113.    Compare  Truck
                                                           _______  _____

            Drivers Local 807 v. Carey Transp., Inc., 816 F.2d 82, 93 (2d
            _________________    ___________________

                                
            ____________________

            produce  a prompt  and satisfactory  solution."   Id.   Under
                                                              ___
            section 1113, before filing a petition to reject a bargaining
            agreement,  the debtor  must  make a  proposal to  the union,
            "based  on  the   most  complete  and  reliable   information
            available at the  time of such  proposal, which provides  for
            those  necessary modifications in  the employees benefits and
            protections that  are necessary to permit  the reorganization
            of  the debtor and assures that all creditors, the debtor and
            all  of   the  affected   parties  are  treated   fairly  and
            equitably," and  must provide the union  with the information
            necessary to evaluate the proposal.   11 U.S.C.   1113(b)(1).
            A court  may approve an  application for rejection  only upon
            finding  that the  debtor or  trustee  has made  the required
            proposal,  that  the union  refused  to  accept the  proposal
            without good cause, and that the "balance of equities clearly
            favors rejection  of [the] agreement."   11 U.S.C.   1113(c).
            Because  Almacs  never filed  an  application  to reject  the
            Agreement, these provisions were not invoked.

            4.  Because the  relevant language of section  365(g) has not
            changed  since  Bildisco,  collective  bargaining  agreements
                            ________
            would appear  still to  be subject to  the section's  general
            provisions.

                                         -9-
                                         -9-

            Cir. 1987) (in balancing the equities to determine whether an

            employer was  permitted  to reject  a  collective  bargaining

            agreement under section 1113, one factor to consider was "the

            possibility  and likely  effect  of any  employee claims  for

            breach of contract if rejection  is approved"); In re Maxwell
                                                            _____________

            Newspapers, Inc., 146 B.R. 920, 934 (Bankr. S.D.N.Y.) (same),
            ________________

            rev'd on  other grounds,  149 B.R.  334 (S.D.N.Y.), aff'd  in
            _______________________                             _________

            part  and rev'd in  part, 981 F.2d  85 (2d Cir.  1992); In re
            ________________________                                _____

            Texas Sheet  Metals, Inc., 90  B.R. 260, 272-73  (Bankr. S.D.
            _________________________

            Tex. 1988) (same); and In re Moline Corp., 144 B.R. 75, 78-79
                               ___ __________________

            (Bankr.   N.D.  Ill.   1992)  (making  same   assumption  and

            suggesting  that because  section  1113  says  nothing  about

            effect of assumption or  rejection, "[section] 365 must apply

            to fill  in the gap") with  In re Blue Diamond  Coal Co., 147
                                  ____  ____________________________

            B.R. 720,  727-28 (Bankr. E.D.  Tenn. 1992), aff'd,  160 B.R.
                                                         _____

            574, 576-77  (E.D. Tenn.  1993) (rejecting claim  for damages

            based on the rejection of a collective bargaining agreement).

            Cf. Mass. Air Conditioning & Heating Corp. v. McCoy, 196 B.R.
            ___ ______________________________________    _____

            659  (D.  Mass.  1996) (assumption  of  collective bargaining

            agreement governed by section 365).

                  We do  not reach that  question here,  however, because

            we  hold that the language  and structure of  section 1113 do

            not  permit  interim  changes  authorized  thereunder  to  be

            construed as "rejections" for purposes of section 365(g).

                                         -10-
                                         -10-

                  We turn to the unambiguous text of  the statute, giving

            effect to its  plain meaning.   See Lomas  Mortgage, Inc.  v.
                                            ___ _____________________

            Louis,  82  F.3d  1, 3  (1st  Cir.  1996).   Section  1113(e)
            _____

            provides that the trustee may implement "interim changes" and

            that "interim  changes shall  not render the  application for

            rejection  moot."     Section   1113(e)  clearly   speaks  of

            "rejection" and  "interim changes" as two  different types of

            actions.  By choosing a different word, "change," to describe

            the interim action, Congress  surely intended for that action

            not  to  have  the  consequences  that would  follow  from  a
            ___

            "rejection."    Indeed,  section  1113(e)  is  explicit  that

            "implementation of such interim  changes shall not render the

            application for  rejection moot."  That  "interim changes" do

            not   moot  a   "rejection"  establishes   that  the   former

            constitutes relief different from the latter.
                               _________

                  The framework of section 1113  also shows that "interim

            changes"  are not  the same  species as  a "rejection."   The

            statute,  by  setting forth  the  procedures  to be  followed

            before  a   debtor-in-possession  "may  assume  or  reject  a

            collective  bargaining agreement,"  11 U.S.C.    1113(a),  or

            "reach   mutually   satisfactory   modifications    of   such

            agreement,"  11 U.S.C.   1113(b)(2), contemplates three final

            actions  that  may be  taken  with  respect to  a  particular

            collective bargaining  agreement.  "Rejection"  of the  whole

            agreement is one of these final actions.  

                                         -11-
                                         -11-

                  Each of  the extensive  provisions regarding  rejection

            suggests  that  a  collective  bargaining  agreement is  only

            "rejected" once,  in its  entirety, not  in bits  and pieces.

            This is because the debtor must make a proposal to modify the

            agreement and meet with  the union representatives to attempt

            to  reach  consensus  before   "seeking  rejection  of  [the]

            collective  bargaining  agreement."   11  U.S.C.     1113(b).

            Further,  the  court   must  make  certain  findings   before

            approving a petition for rejection.  Id.   1113(c).  Whatever
                                                 ___

            the  effects  of the  rejection  of  a collective  bargaining

            agreement  under  section  1113,  rejection is  an  act  that

            involves  a   final  repudiation  of  the  entire  agreement.

            Interim  changes under  section 1113(e),  on the  other hand,
            _______

            are, by  definition, not  final.   They only  are implemented

            pending  the  final   act  of  assumption,  modification   or

            rejection, while  the  agreement still  remains otherwise  in

            effect.

                  Finally,  by  providing  different  standards  for  the

            approval  of "rejections"  and  "interim  changes,"  Congress

            clearly intended not to treat the latter as merely a category

            of the former.  The  standards governing rejections have both

            a procedural  component and a substantive  component.  Before

            the  debtor  may  even  file   an  application  to  reject  a

            bargaining agreement,  it must make  a proposal to  the union

            for modifications to the contract, and the application cannot

                                         -12-
                                         -12-

            be  approved  unless  the  union has  rejected  the  proposal

            without good  cause.  11 U.S.C.    1113(b)(1) &  (c)(2).  The

            debtor  must also negotiate with  the union in  an attempt to

            reach mutually satisfactory modifications.  Id.   1113(b)(2).
                                                        ___

            The substantive  component requires that the debtor's initial

            proposal  encompass only  those  modifications "necessary  to

            permit the reorganization  of the debtor."  Id.   1113(b)(1).
                                                        ___

            Because a plan of  reorganization may not be confirmed  if it

            is  likely to  be followed  by liquidation  or the  "need for

            further  financial  reorganization," id.     1129(a)(11), the
                                                 ___

            modifications  are  proposed  with  a view  to  the  long-run

            success of the debtor's business.  

                  The  standards  for  "interim changes,"  on  the  other

            hand,  deal with the short  term.  Only  the basic procedural

            safeguards,  "notice  and  a  hearing," are  required.    The

            substantive standard  is that the changes  must be "essential

            to  the  continuation  of  the  debtor's  business."   Id.   
                                                                   ___

            1113(e).   This language suggests that  "interim changes" are

            only permitted  under emergency  conditions, when the  debtor

            otherwise  would  likely collapse.    See  In  re Salt  Creek
                                                  ___  __________________

            Freightways, 46 B.R.  347, 350  (Bankr. D. Wy.  1985); In  re
            ___________                                            ______

            Almac's, Inc., 159 B.R.  665, 666 (Bankr. D.R.I. 1993).   The
            _____________

            scope  of   "interim  changes"  is  more   limited  than  the

            modifications "necessary for reorganization."  See Martha  S.
                                                           ___

            West,  Life After  Bildisco:   Section 1113  and the  Duty to
                   ____________        __________________________________

                                         -13-
                                         -13-

            Bargain  in  Good Faith,  47 Ohio  St.  L.J. 65,  146 (1985).
            _______________________

            Because "interim  changes" are  ordered to ensure  the short-

            term viability of the  debtor, they do not dictate  the final

            decision to  assume, reject  or mutually modify  the original

            collective bargaining agreement.

                  If Congress  had intended the  result Local  328 urges,

            it could  easily have  provided so  by inserting an  explicit

            provision allowing for a  claim, by calling "interim changes"

            "partial rejections,"  or by using other  language from which

            it could be definitively inferred that "interim changes" were

            "rejections"  subject  to  the  consequences   delineated  in

            section 365.   The language  Congress actually used  does not

            suggest  this treatment.   There is  simply no  evidence that

            Congress  intended  "interim  changes"  to  be  the  same  as

            "rejection."

                  Local 328 argues that not  treating the section 1113(e)

            changes  here as a  rejection would  lead to  an unreasonable

            outcome because the modifications  in this case had the  same

            effect  as  a rejection.    See  Massachusetts v.  Blackstone
                                        ___  _____________     __________

            Valley  Elec. Co., 67 F.3d 981, 986 (1st Cir. 1995) ("[P]lain
            _________________

            meaning  must  govern  [a statute's]  application,  unless  a

            palpably  unreasonable  outcome  would  result.").    Without

            adopting Local 328's premise, we  conclude that the result we

            reach is far from unreasonable.  Congress could  have thought

            the   denial  of   a   remedy  to   compensate  for   interim

                                         -14-
                                         -14-

            modifications was a reasonable quid pro quo to the debtor, in
                                           ____________

            exchange for  the protective benefits that  flow to employees

            from allowing  the collective bargaining  agreement to remain

            in effect  following the  filing  of a  Chapter 11  petition.

            Before Congress enacted section  1113, a debtor was permitted

            to make  unilateral modifications to a  collective bargaining

            agreement  after filing  a  petition in  bankruptcy and  such

            modification  did  not constitute  an unfair  labor practice.

            Bildisco,  465 U.S.  at  534.    In  section  1113,  Congress
            ________

            provided   that   collective   bargaining    agreements   are

            enforceable against the debtor after the filing of a petition

            for  reorganization.   11  U.S.C.    1113(c),  (e) &  (f);  5

            Collier on Bankruptcy   1113.01[4][b],  at 1113-14 to 1113-15
            _____________________

            (Lawrence P. King ed., 15th ed.  1995).  In exchange for this

            heightened   protection,   Congress  could   reasonably  have

            required employees to accept  decreased wages and benefits in

            an  emergency  before  any  final action  on  the  collective

            bargaining  agreement  is taken,  without  providing for  the

            employees  to recover all or  part of the  wages and benefits

            lost in the interim reductions.

                  The interim changes authorized  by the bankruptcy court

            under  section  1113(e)  were  not,  in  and  of  themselves,

            "rejections"  of  the Agreement  within  the  meaning of  the

            Bankruptcy Code.

                  Affirmed.
                  _________

                                         -15-
                                         -15-