Appendix — New York Typographical Union, No. 6 v. Royal Composing Room, Inc., 109 S. Ct. 1529 (1989) (No. 88-1108)

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IN RE: ROYAL COMPOSING ROOM, INC.,

Debtor,

NEW YORK TYPOGRAPHICAL UNION NO. 6

Petitioner,

against

ROYAL COMPOSING ROOM, INC.,

Respondent.

APPENDIX TO.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

TRWIN BLUESTEIN

(Counsel of Record)

Attorney for Petitioner

1501 Broadway, Suite 800

New York, New York 10036

(212) 354-8330

TABLE OF CONTENTS

OPINION OF THE COURT OF APPEALS

FOR THE SECOND CIRCUIT.....2eeeeeeeee 1

OPINION OF THE DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF

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OPINION OF THE BANKRUPTCY COURT

FOR THE SOUTHERN DISTRICT OF

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ORDER OF THE COURT OF APPEALS

FOR THE SECOND CIRCUIT

AFFIRMING THE JUDGMENT OF THE

DISTRICT COURT... cc ccccrcccrcseeccces 111

ORDER OF THE COURT OF APPEALS

FOR THE SECOND CIRCUIT

DENYING PETITION FOR REHEARING

WITH SUGGESTION FOR REHEARING

IN BANC... cc cccccccccccccccccesscccece 113

ORDER OF THE SUPREME COURT OF

THE UNITED STATES EXTENDING

TIME TO FILE PETITION FOR A

WRIT OF CERTIORARI... 2... cececcececvees 115

APPENDIX A

VOO0001

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

No. 779—August Term 1987

Argued: February 22, 1988 Decided: May 27, 1988

Docket No. 87-5043

—

IN RE: ROYAL COMPOSING ROOM, INC.,

Debtor,

NEW YORK TYPOGRAPHICAL UNION NO. 6,

Plaintiff-Appellant,

—against—

ROYAL COMPOSING ROOM, INC.,

Defendant-A ppellee.

Before:

FEINBERG, Chief Judge, PRATT, Circuit Judge,

and MCLAUGHLIN, District Judge for the Eastern

District of New York, sitting by designation.

Appeal from a judgment of the United States District

Court for the Southern District of New York, John F.

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Keenan, Judge, affirming a judgment of the bankruptcy

court, granting application of debtor Royal Composing

Room, Inc., to reject its collective bargaining agreement

with New York Typographical Union Local No. 6, pursu-

ant to § 1113 of the bankruptcy code.

Affirmed. Chief Judge Feinberg dissents in a separate

opinion.

DANIEL ENGELSTEIN, New York, NY (Stuart

E. Bauchner, Vladeck, Waldman, Elias &

Engelhard, P.C., New York, NY, David

Silberman, AFL-CIO, Washington, DC,

of Counsel), for Plaintiff-A ppellant.

MICHAEL D. HESS, New York, NY (Marjorie

L. Cohen, Owen C. Pell, Brian G. Hart,

White & Case, New York, NY, of Coun-

sel), for Defendant-A ppellee.

—»

PRATT, Circuit Judge:

For the second time in a year we are called upon to inter-

pret § 1113 of the bankruptcy code, 11 U.S.C. § 1113

(1987 West Supp.), and the circumstances under which a

debtor may reject a collective bargaining agreement as

part of its reorganization. As in Truck Drivers Local 807

v. Carey Transportation, 816 F.2d 83 (2d Cir. 1987), we

affirm the judgment of the district court, which upheld the

bankruptcy court’s determination that the debtor, Royal

Composing Room, Inc. (‘‘Royal’’), had met the require-

ments of § 1113 and granted Royal’s application to reject

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its agreement with New York Typographical Union Local

No. 6 (‘‘the union’’).

BACKGROUND

Over the last 10 years, there have been enormous

changes in the printing industry. The traditional method

of printing with linotype machines has been replaced by

faster, cheaper methods of computer printing that have

revolutionized the market.

As with most technological innovations, those in the

printing industry created opportunities for some and di-

lemmas for others. One of those facing difficult choices

was Royal, which had been a leader in the specialized field

of advertising typography.

Foremost among these choices was what to do about its

relatively high labor costs. Royal was faced with a union-

ized work force in an industry wherein its new competitors

were not unionized, resulting in Royal being unable effec-

tively to meet the market price for its product. As the

bankruptcy court noted, ‘‘Royal * * * is one of the last

unionized advertising typography shops in New York

City.’’ In re Royal Composing Room, Inc., 62 B.R. 403,

404 (Bkrtcy. S.D.N.Y. 1986). The problem was exacer-

bated by seniority rules—known in the industry as

‘‘priority’’—which obligated Royal to retain its most sen-

ior employees, even though they were trained on and most

qualified for the now-outdated linotype machines.

These pressures caused a gradual deterioration in Roy-

al’s financial condition. From 1976 to 1985, its gross re-

ceipts declined from $7.8 million to $5.9 million; after

posting a profit in every year between 1976 and 1981 ex-

cept one, it has lost money every year since 1982. As the

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bankruptcy court found, when Royal filed its chapter 11

petition on March 14, 1986, it was ‘‘virtually at the last

moment its tangible assets were sufficient to pay its liabili-

ties.’”” Royal Composing Room, 62 B.R. at 411. The court

went on to sum up Royal’s problems:

Royal is an economic anachronism. * * * [A] survey

[was] conducted in March 1986 which revealed that

type buyers are extremely cost conscious and that the

large number of non-union producers has driven

prices down to the point where the market price is be-

low the cost per unit of a union shop such as Royal.

* * * If Royal meets the market price, it can operate

at capacity but it will lose money. If Royal keeps its

present prices, volume will drop, and Royal will also

lose money.

Id. at 412 (summarizing and accepting testimony of Dr.

Ralph Gray).

Based on these difficulties, and similarly dismal projec-

tions of future losses, Royal in 1985 began to seek conces-

sions from the union. See id. at 408. For reasons disputed

by the parties, the union was unwilling to grant any relief

to Royal, leading the company to file its bankruptcy peti-

tion in March, 1986.

Under § 1113 of the bankruptcy code, a debtor must

make a proposal to the union before it applies to the bank-

ruptcy court to reject a collective bargaining agreement.

The proposal must be limited to ‘‘those necessary modifi-

cations in the employees’ benefits and protections that are

necessary to permit the reorganization of the debtor

** * °' 11 U.S.C. § 1113(b)(1)(A). Royal made its pre-

rejection proposal on March 18, 1986.

From that date through May 8, the parties engaged in

limited negotiations, characterized by what Judge Abram

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termed ‘‘a stonewall’’ position adopted by the union.

Royal Composing Room, 62 B.R. at 408. The union made

only one counter-proposal, that coming on May 5, at the

final pretrial conference. As to thai proposal, the bank-

ruptcy court found that it ‘‘provided significantly less eco-

nomic relief to the Debtor than the interim relief which

had been granted on March 21 * * * .’’ Jd. at 410. Be-

tween March 18 and May 8, there were only two short ne-

gotiating sessions, and the blame for the lack of a real

effort to reach an accommodation was laid squarely upon

the union by Judge Abram. Jd. at 409 (‘‘The Debtor was

continuously available for and sought meetings. * * * At

no time prior to May 5, did the union make a counter-

proposal, comment item by item on the Debtor’s financial

situation, or state any reasons why it found the Debtor’s

request to be unfair or inequitable.’’ (footnote omitted)).

Trial commenced on May 8. The union concentrated its

efforts on demonstrating that Royal did not require the

savings it had sought in its March 18 proposal, and there-

fore that the proposal was not limited to ‘‘necessary modi-

fications’’ to the agreement.

The bankruptcy court, however, concluded that Royal’s

proposal was necessary to its successful reorganization,

thereby clearing the threshold requirement for obtaining

approval to reject its union contract. The court reasoned

that where the union rejects the debtor’s proposal without

good cause, and does not engage in good faith negotia-

tions toward a compromise, and the ‘‘debtor is in need of

substantial relief’’, 62 B.R. at 408, the case for rejection of

the contract is at its strongest, under the ‘‘balance of the

equities’’ test contained in § 1113. 11 U.S.C. § 1113(c)(3).

The bankruptcy court went on to evaluate the debtor’s

need for relief of the scope represented by its proposal,

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finding that the charges were not ‘‘inherently unreasona-

ble’’ and concluding that Royal’s recent history of lost

business and operating losses, combined with bleak pro-

jections about its future, made plain ‘‘that Royal estab-

lished its need for relief on the order of magnitude’’

contained in its proposal. Jd. at 418. Despite the somewhat

inartful phrasing, the conclusion that the proposal was

limited to necessary modifications is clear, and the court

granted Royal’s application to reject its union contract.

The district court affirmed, and this appeal followed.

DISCUSSION

On appeal, the union has narrowed the focus of its at-

tack on Royal’s proposal. It now contends that Royal

failed to show the necessity for eliminating priority. The

union implicitly argues that if any single vital element of

the proposal—such as the elimination of priority—cannot

be shown to be necessary within the meaning of § 1113,

the entire proposal cannot be deemed ‘‘necessary’’, and

rejection of the contract must be denied. We reject the

union’s argument on two grounds. First, we disagree with

its reading of § 1113, and hold that, at least in these cir-

cumstances, the focus should be on the proposal as a

whole. Second, the bankruptcy court’s conclusion that

Royal had, in fact, shown the necessity for eliminating pri-

Ority amply is supported by the record and therefore is not

clearly erroneous.

I]. The Meaning of ‘‘Necessary’’ in § 1113.

The term ‘‘necessary’’ appears twice in § 1113. It re-

quires the pre-rejection proposal to contain only ‘‘neces-

sary modifications’’, and that the proposal be ‘‘necessary

to permit the reorganization of the debtor.’’ 11 U.S.C.

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§ 1113(b)(1)(A). We have interpreted the necessity require-

ment of § 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.

This conclusion is buttressed by the general inconsis-

tency between holding, as we did in Carey Transportation,

that the debtor’s proposal need not be limited to ‘‘abso-

lutely 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 § 1113 articulated in Carey Transportation.

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.

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 ‘‘neces-

sary’’ if itcan be replaced by some alternative not included

in the package which would achieve the same dollar sav-

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ings 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 sav-

ings and the same likelihood of a successful reorganiza-

tion. 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 ap-

plication 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

* * Ms ae

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 § 1113. It can ar-

gue that the part of the proposal it cannot-accept was in-

cluded by the employer in bad faith, in an effort to

stalemate negotiations and allow it to obtain outright re-

jection 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.

Alternatively, the union can negotiate with the debtor.

Although this is plainly what congress was seeking to en-

2 AEE ONE TE OR ee TRS

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courage when it passed § 1113, see id. at 405-06 (reviewing

legislative history); Jn 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 vi-

tal part of the proposal is unacceptable, it should enter

into good faith negotiations aimed at moderating that ele-

ment, or at substituting a measure less offensive to the

union but achieving comparable savings for the debtor.

But, in this case, the union refused even to discuss the

issue. Not only did the union take the position that prior-

ity was nonnegotiable; it went still further and refused to

negotiate at a// until priority was taken out of Royal’s pro-

posal. Jd. at 410.

A union certainly is entitled to adopt a hard-line posi-

tion, but if, as in this case, the union does so, it must rec-

ognize 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. § 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.’’); Jn 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 sac-

rifices or concessions.’’). Cf. Jn re Kentucky Truck Sales,

§2 B.R. 797, 799 (Bkrtcy. W.D. Ky. 1985) (crediting as im-

portant testimony that ‘“‘the debtor has already made

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nearly all possible cost cuts in the nonlabor areas of its op-

eration’’). Moreover, the rejection of the proposal by the

union in such circumstances will almost always without ex-

ception be without good cause, another prerequisite to the

debtor obtaining rejection of the contract. 11 U.S.C.

§ 1113(c)(2).

Put simply, where a union refuses to negotiate in crder

to obtain a different combination of modifications, it may

not challenge the particular combination, or any vital ele-

ment, 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 rejec-

tion by belatedly attacking a specific element.

In terms of § 1113, the burden on the parties to negoti-

ate is best analyzed under § 1113(c)(2), which permits re-

jection 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 pre-

serving the debtor’s required savings, it would be unlikely

that its rejection of the proposal could be found to be lack-

ing 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.

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 per-

haps 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 Compos-

ing Room, 62 B.R. at 414. This amount was less than its

projected losses operating under the union contract. /d. It

may be true that the same goal might have been reached

| VOOOLL

| 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 neces-

sary, if not absolutely minimal, distance Royal had to tra-

vel. No more is necessary to justify rejection under § 1113,

as interpreted by Carey Transportation.

Il. The Necessity of Eliminating Priority.

Even if we were to view the proper focus to be on the

single element of eliminating priority, we would conclude

that Royal demonstrated that it was a ‘‘necessary modifi-

cation’’ as that term was defined in Carey Transportation.

The bankruptcy court did not make an explicit finding as

to the necessity for eliminating priority; nevertheless, such

a finding is implicit in Judge Abram’s opinion, and fully is

supported by the record.

One of the major difficulties facing Royal was the rela-

tive inflexibility it had in utilizing its work force. The com-

pany had reached the point where it was employing more

workers than it needed or could afford, but it could ill af-

ford to lay off workers because, under the union con-

tract’s priority system, it would have had to lay off its

most junior workers. Unlike the ordinary situation, where

one could expect the most senior workers—those with the 5

greatest experience—to be the most productive, Royal was

in exactly the opposite position. Its senior personnel were

least proficient on the computer machinery that has taken

over the industry, and to compete Royal needed to retain

employees who lacked seniority but were most efficient on

the latest equipment. See id. at 417.

Thus, as the bankruptcy court held, ‘‘{I]n concept, the

f changes [in priority] are not inherently unreasonable.”’

The union strenuously argues that concluding that priority

VO00i2

changes are ‘‘not inherently unreasonable’’ is insufficient

to justify the proposal, because it is far short of ‘‘neces-

sary’’. This may well be true, but we view the bankruptcy

court’s statement as a natural response to the union’s posi-

tion that any changes at all in priority were unacceptable.

Thus, the bankruptcy court began with the conclusion that

priority was not off-limits, because changes in priority

‘fare not inherently unreasonable.’’

But the bankruptcy court did not stop there. It went on

to explain the need to eliminate, rather than merely mod-

ify, priority, in terms of Royal’s need for flexibility in as-

signments and lay-offs. Judge Abram wrote, ‘‘The Debtor

will in the future be faced with enormous competitive pres-

sure which will require it to have maximum flexibility, in-

cluding with respect to utilization of its unionized labor, in

order to mold and adapt in a changing business environ-

ment.’’ Jd. at 416-17.

The union urges that Royal showed only a need for a

short-term intrusion into priority, and to depart only on

its current lay-offs to result in a work force that would

achieve the savings Royal said it expected from completely

eliminating priority.

There are two flaws in this argument. First, it ignores

Royal’s need for long-term flexibility in order to have a

truly successful reorganization, one that results in a

healthy company emerging from the process. A debtor’s

proposal need not be limited to the bare bones relief that

will keep it going. See Carey Transportation, 816 F.2d at

89 (‘‘[I]t becomes impossible to weigh necessity as to reor-

ganization without looking into the debtor’s ultimate

future and estimating what the debtor needs to attain

financial health.’’); Royal Composing Room, 62 B.R. at

418 (‘‘A debtor can live on water alone for a short time but

U06013

over the long haul it needs food to sustain itself and retain

its vigor.’’).

Second, it is to be expected that Royal would demon-

strate the difficulties with priority by showing its current

need to depart from priority. This does not mean, how-

ever, that the showing supports only the necessity of the

currently proposed lay-offs. As Judge Abram noted,

‘*Projections are necessarily speculations about the future

and are an art, rather than a science.’’ Jd. at 407. We will

not hold Royal to show the necessity of every conceivable

future use of the flexibility it now requires; it is enough

that the bankruptcy court found it needs that flexibility. In

an industry where rapid change has been the rule, and

where the current need for intrusion into priority is well-

established, the implicit finding of a general need to escape

from the priority provision to help assure the future health

of the company is not clearly erroneous.

CONCLUSION

In short, Royal has shown a need for the level of savings

it sought to achieve in its pre-rejection proposal. At least

where the union has refused to bargain over particular ele-

ments of the proposal, it cannot attack any specific ele-

ment in seeking to show the proposal is not ‘‘necessary’’.

Here, in any event, the need for eliminating priority ade-

quately was established and the bankruptcy court’s factual

findings support the conclusion that the proposal was lim-

ited to ‘‘necessary modifications’’, thus justifying rejec-

tion of Royal’s contract with Local 607. We can only hope

that the parties will now sit down and negotiate in good

faith to reach a new agreement to replace the rejected con-

tract, and reconcile the needs of company and workers

lala a

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alike in an industry where both sides are faced with dra-

matic, and often painful, changes.

The judgment of the district court is affirmed.

FEINBERG, Chief Judge (dissenting):

This appeal raises the question of whether a statute de-

signed to make it more difficult for employers in bank-

ruptcy proceedings to reject labor contracts can be used in

a way that Congress obviously sought to avoid. I dissent

from the majority opinion principally because it misinter-

prets the applicable section of the Bankruptcy Code, and

thereby unjustifiably allows an employer to use bank-

ruptcy as a way of getting rid of a union contract.

As the majority notes, this case involves the proper in-

terpretation of section 1113(b)(1)(A) of the Bankruptcy

Code, which forbids rejection of a labor contract unless

management (I use this as shorthand for the debtor-in-

possession or the bankruptcy trustee) first makes ‘‘a pro-

posal to the [union] . .. which provides for those

necessary modifications in the employees benefits and pro-

tections that are necessary to permit the reorganization of

the debtor.’’ Section 1113 is reproduced in the margin for

convenient reference.' Because the majority agrees that in-

terpreting 11 U.S.C. § 1113 is at the heart of this case, it is

remarkable that the majority almost completely ignores

1 Section 1113 of the Bankruptcy Code reads as follows:

§ 1113. Rejection of collective bargaining agreements

(a) The debtor in possession, or the trustee if one has been ap-

pointed under the provisions of this chapter, other than a trustee in

a case covered by subchapter IV of this chapter and by title I of the

Railway Labor Act, may assume or reject a collective bargaining

agreement only in accordance with the provisions of this section.

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Se ARPES NS Se

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the legislative history of that section. That history rein-

forces what is implied by the statutory language itself:

(b)(1) Subsequent to filing a petition and prior to filing an appli-

cation seeking rejection of a collective bargaining agreement, the

debtor in possession or trustee (hereinafter in this section ‘trustee’

shall include a debtor in possession), shall—

(A) make a proposal to the authorized representative of the

employees covered by such agreement, based on the most com-

plete and reliable information available at the time of such pro-

posal, 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

(B) provide, subject to subsection (d)(3), the representative of

the employees with such relevant information as is necessary to

evaluate the proposal.

(2) During the period beginning on the date of the making of a

proposal provided for in paragraph (1) and ending on the date of

the hearing provided for in subsection (d)(1), the wustee shall meet,

at reasonable times, with the authorized representative to confer in

good faith in attempting to reach mutually satisfactory modifica-

tions of such agreement.

lective bargaining agreement only if the court finds thar—

(1) the trustee has, prior to the hearing, made a proposal that

fulfills the requirements of subsection (b)(1);

(2) the authorized representative of the employees has refused

Lo accept such proposal without good cause; and

(3) the balance of the equities clearly favors rejection of such

agreement.

(d)(1) Upon the filing of an application for rejection the court

shall schedule a hearing to be held not later than fourteen days after

the date of the filing of such application. All interested parties may

appear and be heard at such hearing. Adequate notice shall be pro-

vided to such parties at least ten days before the date of such hear-

ing. The court may extend the time for the commencement of such

hearing for a period not exceeding seven days where the circum-

stances of the case, and the interests of justice require such exten-

sion, or for additional periods of time to which the trustee and

representative agree.

VOG016

Congress intended section 1113 to make rejection of

signed labor contracts difficult (but not impossible) and

was especially concerned that bankruptcy not become a

union-busting tool. Understanding the genesis of the stat-

ute so influences a proper reading of it that I think it

worthwhile to set out the legislative history at length.

I. Legislative History of Section 1113

In 1975, this court resolved the ‘‘tension between the

Bankruptcy Act’s policy in favor of giving the debtor a

new start and the Labor Act’s policy of encouraging en-

(2) The court shall rule on such application for rejection within

thirty days after the date of the commencement of the hearing. In

the interests of justice, the court may extend such time for ruling

for such additional period as the trustee and the employees’ repre-

sentative may agree to. If the court does not rule on such applica-

tion within thirty days after the date of the commencement of the

hearing, or within such additional time as the trustee and the em-

ployees’ representative may agree to, the trustee may terminate or

alter any provisions of the collective bargaining agreement pending

the ruling of the court on such application.

(3) The court may enter such protective orders, consistent with

the need of the authorized representative of the employee to evalu-

ate the trustee’s proposal and the application for rejection, as may

be necessary to prevent disclosure of information provided to such

representative where such disclosure could comproinise the position

of the debtor with respect to its competitors in the industry in which

it is engaged.

(e) 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 es-

tate, the court, after notice and a hearing, may authorize the trustee

to implement interim changes in the terms, conditions, wages, bene-

fits, 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.

(f) No provision of this title shall be construed to permit a trustee

to unilateraily terminate or alter any provisions of a collective bar-

gaining agreement prior to compliance with the provisions of this

section.

V00017

forcement of collective bargaining agreements,’’ by allow-

ing labor contracts to be rejected only if ‘‘it clearly ap-

pears to be the lesser of two evils and that, unless the

agreement is rejected, [the debtor] will collapse and the

employees will no longer have their jobs.’’ Brotherhood of

Railway, Airline and Steamship Clerks v. REA Express,

Inc., 523 F.2d 164, 167, 172 (2d Cir.), cert. denied, 423

U.S. 1017 (1975). However, in 1984 the Supreme Court

stated that REA made rejection of labor contracts too dif-

ficult, and instead adopted a balancing of the equities test,

which allowed rejection if ‘‘the collective-bargaining

agreement burdens the estate . . . [and] the equities bal-

ance in favor of rejecting the labor contract.’’ NLRB v.

Bildisco & Bildisco, 465 U.S. 513, 526 (1984). This test was

widely viewed as so undemanding that it would ‘‘almost

always lead to approval of a repudiation’’ because ‘“‘it is a

rare casein which. . . relieving the employer of [the] bur-

den [of the contract] will not. . . aid the ‘success of the

reorganization.’ ’’ 130 Cong. Rec. S6184 (daily ed. May

22, 1984; statement of Sen. Packwood). The Court also

held that management can reject the contract unilaterally

without waiting for judicial approval.

On the very day the Supreme Court handed down its de-

cision, Representative Rodino, chair of the House Judici-

ary Committee (which has jurisdiction over bankruptcy),

introduced a bill (H.R. 4908) to overturn both aspects of

Bildisco and to ‘‘require the bankruptcy judge to apply the

standard used in the second circuit REA Express opin-

ion.’? 130 Cong. Rec. 2989 (Feb. 22, 1984). As incorpo-

rated into the House’s general bankruptcy reform bill

(H.R. 5174), the bill permitted rejection only after a judi-

cial hearing and even then only if the reorganization would

otherwise fail and if the debtor had first proposed modifi-

cations to the agreement ‘‘necessary . . . for successful

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financial reorganization.’’ Id. at H1842 (daily ed. March

21, 1984). Opponents of the bill objected that the pro-

posed standard for rejection of labor contracts was too

high to allow needed reorganizations, but the bill passed

the House on March 21, 1984. Id. at H1854 (daily ed.

March 21, 1984).

In the senate, Senator Thurmond, chair of the Senate

Judiciary Committee, introduced a bill that preserved

Bildisco’s balance of the equities test but prohibited rejec-

tion of a contract until at least 30 days after a motion todo

so. The bill was ‘‘reluctantly’’ accepted by the business

community but rejected by labor. 130 Cong. Rec. at S6084

(daily ed. May 21, 1984). The next day, Senator Packwood

offered as an amendment a substitute bill developed with

the cooperation of labor leaders. The Packwood amend-

ment required court approval before rejection and estab-

lished a threshold requirement similar to what is now

law—in order to ask a court to balance the equities, man-

agement must first make ‘‘a proposal. . . providing for

the minimum modifications in such employees benefits

. . that would permit the reorganization.’’ Id. at $6181

(daily ed. May 22, 1984). In other words, management had

to limit itself by asking for only necessary changes in the

labor contract and by not asking for changes that it

thought desirable, but not, strictly speaking, necessary.

Opponents criticized the Packwood amendment as ‘‘too

stringent,’’ Id. at S6191 (daily ed. May 22, 1984; statement

of Sen. Hatch), and as making ‘‘it extremely difficult, if

not impossible, for companies . . . to obtain relief under

Chapter 11.’’ Id. at S6194 (daily ed. May 22, 1984; state-

ment of Sen. Thurmond). Apparently fearing defeat in the

Senate and persuaded that the House would approve the

Packwood amendment, Id. at S6189 (daily ed. May 22,

1984), the opponents of the Packwood amendment suc-

Loo)

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U00019

ceeded in avoiding a vote on either proposal and in having

the Senate go into the conference committee without a

labor provision at all.

In the conference committee, the Senate conferees ap-

parently offered to drop a provision to create 85 new

judgeships that could be filled before the Presidential elec-

tion that fall if the House dropped Rodino’s provision and

let Bildisco survive. Id. at S8888 (daily ed. June 29, 1984;

statement of Sen. Thurmond), reprinted in 1984 U.S.

Code Cong. & Ad. News 576, 582. The House refused. In

the compromise that resulted, the conference committee

modified the judicial authorization slightly and reported

out, see H.R. Conf. Rep. No. 882, 98th Cong., 2d Sess.

61-62 (1984), the current version of section 1113, which

takes most of its provisions from the Rodino and Pack-

wood bills but contains a provision for interim relief pend-

ing a ruling on a rejection application, see § 1113(e), that

is inspired by the Thurmond bill.

The law enacted was thus not a complete victory for ei-

ther side, In Re Century Brass Products, Inc., 795 F.2d

265, 276 (2d Cir. 1986): an employer (again, I use this as

shorthand for the debtor-in-possession or trustee) might

obtain interim relief from the bankruptcy court even

though the labor contract was not yet rejected, but the

weak Bildisco standard for rejection was ‘‘modified,’’ see

Century Brass Products, 795 F.2d at 272, and strength-

ened in a number of ways. Most notable in this context is

that in order to be able to reject a contract in a bankruptcy

proceeding management before applying for rejection

must ‘‘makea proposal. . . which provides for those nec-

essary modifications in the employees benefits and protec-

tions that are necessary to permit the reorganization of the

debtor.’’ § 1113(b)(1)(A) (emphasis supplied).

000020

Thus, section 1113 in its final form is a pro-labor law.

As its strongest opponent, Senator Thurmond, said in in-

troducing the conference bill to the Senate, ‘‘were it not

for the critical need to pass this bankruptcy bill [the Bank-

ruptcy Amendments and Federal Judgeship Act of 1984,

which reorganized the bankruptcy courts after the Su-

preme Court had ruled them unconstitutional], I could not

have agreed to’’ section 1113, since its ‘‘procedures and

standard are essentially the same as those of the Pack wood

amendment.’’ Id. at $8888 (daily ed. June 29, 1984), re-

printed in 1984 U.S. Code Cong. & Ad. News 576, 582. As

Senator Packwood explained, ‘‘the debtor will not be able

to exploit the bankruptcy procedure to rid itself of un-

wanted features of the labor agreement that have no rela-

tion to its financial condition. . . . The word ‘necessary’

inserted twice into this provision clearly emphasizes this

required aspect of the proposal which the debtor must

offer.’’ Id. at S8898 (daily ed. June 29, 1984).

I have set out the legislative history at length because |

believe it shows that a political battle was fought over sec-

tion 1113, and that, as far as is relevant to management’s

proposal here, those who wished to make rejecting a labor

contract move difficult were successful. It is against this

background that the bankruptcy court’s decision in this

case should be judged.

II. Discussion

As I understand it, in affirming that opinion the major-

ity adopts alternative holdings. On the one hand, it says

that ‘‘where a union refuses to negotiate in order to obtain

a different combination of modifications [in a proposal],

it may not challenge the particular combination, or any vi-

tal element, contained in the debtor’s proposal. So long as

Ee See

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000021

the total quantum of savings is necessary . . . the union

may not prevent rejection.’’ (p. 11). This rule—which

lowers the standard of necessity to punish the union for ig-

noring a gratuitously harmful modification—is essentially

the same as the bankruptcy court’s holding that because

the union stonewalled after receiving the employer’s pro-

posal, the court would ‘‘focus on the larger picture:

whether the Debtor has shown any necessity for modifica-

tions of the magnitude it proposed.’’ In re Royal Compos-

ing Room, 62 Bankr. 403, 411 (Bankr. S.D.N.Y. 1986).

Alternatively, the majority says that ‘‘[e]ven if we were to

view the proper focus to be on the single element of elimi-

nating priority, we would conclude that Royal demon-

strated that it was a ‘necessary modification.’ ’’ (p. 12).

Each holding will be considered in turn.

A. Negotiations and the Easier Standard for Necessity

It must be remembered that Section 1113 requires an

employer to include only necessary modifications in its

proposal. (Hereafter, I use ‘‘proposal’’ in the technical

sense to refer to a proposal made by management to sat-

isfy section 1113(b)(1)). The majority’s first alternative

holding purports to shift the analysis from the individual

contractual modifications that censtitute the employer’s

proposal to the proposal as a whole. However, the total

savings generated by a proposal composed of several items

cannot be determined without knowing the savings gener-

ated by each item. Moreover, in applying its rule, the ma-

jority considers only the savings to management from the

proposal and ignores the harm to the union. This com-

bined approach overlooks the fact that a particular pro-

posed contract change may harm the union greatly and

help the employer economically little, if at all. In addition,

the majority’s rule incorrectly looks to the Union’s negoti-

a ae a

VOG022

ating record to determine which definition of necessity to

use.

The bankruptcy court acknowledged that it was depart-

ing from the statutory standard in considering the union’s

negotiating posture and in not weighing the employer’s

proposal on its own merits. It stated that ‘‘Although Code

§ 1113(c)(1) starts with the debtor’s proposal, this court

declines to make the debtor’s proposal itself the first and

foremost topic of consideration as placing such primacy

on the proposal inhibits, rather than fosters, . . . pre-

hearing negotiations.’’ 62 Bankr. at 406-07. This was con-

trary to Century Brass, 795 F.2d at 273, which tracked the

Statutory language in setting out the order of the three-

part rejection test.

The statute gives no indication that the union’s negotiat-

ing position should govern the definition, or application,

of the standard of necessity. Moreover, although section

1113 does require bargaining between employees and fi-

nancially unsuccessful management,’ it does not abso-

lutely obligate a union to negotiate regardless of the terms

of management’s proposal. To the contrary, the point of

the requirement that the proposal contain only ‘‘neces-

sary’’ modifications is to limit when a union can be re-

2 I believe that Congress intended at least some bargaining to occur

between the time management makes a proposal and the time it applies

to reject the contract. Management should therefore make its proposal

sufficiently in advance of its application to allow negotiations. Cf.

Wheeling-Pitusburgh Steel Co. v. United Steelworkers of America, 791

F.2d 1074, 1077, 1093 (3d Cir. 1986) (three weeks between proposal

and application). In this case, Royal seems to have prepared its appli-

cation before making its proposal on March 18 and filed the applica-

tion the next day. This behavior, while not necessarily proof of bad

faith, prevented meaningful negotiations after bankruptcy had become

a reality but before management's inflammatory attempt to abrogate

the contract completely. Such behavior should be discouraged.

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000023

quired to reopen and renegotiate an already signed

contract.

In contrast, the majority requires unions to negotiate

over terms that save nothing—which by no stretch of the

imagination can be called ‘‘necessary’’—even though

those terms mortally wound the union, because refusal to

negotiate over a specific term bars the union from object-

ing to that term at the subsequent rejection hearing.’ Con-

sider the following hypothetical: a bankrupt company that

needs to save $200,000 per year to reorganize successfully

proposes the following as ‘‘necessary’’ modifications to its

union contract: (1) reduce the wages of each of its 100

union employees by $2,000 per year; (2) eliminate the con-

tract’s ‘‘last-hired, first-fired’’ provision; and (3) elimi-

nate a union-dues check-off provision that requires

management to deduct union dues from employees’ pay-

checks but does not require management to contribute any

funds to the union. Assume that provisions two and three

Save no money, and the union refuses to negotiate until

they are removed from the bargaining table. Under the

majority’s first alternative approach, the contract could be

rejected, since the total savings ($200,000) is necessary and

since the union’s refusal to negotiate bars it from contest-

ing the details of the plan. The majority’s approach is al-

most as absurd when a management proposal would save

little money relative to the amount needed to be saved and

the damage to the union is great, as is the case if, for ex-

ample, eliminating the dues check-off provision might

3 The majority says that the union is barred from challenging ‘‘vital’’

elements of the proposal. However, the majority never defines ‘‘vital,”’

which is not a statutory term. If ‘‘vital’’ means ‘‘necessary,’’ then the

word adds nothing. If it means something other than necessary, then

adding the term creates another layer of confusion and opportunity for

litigation.

000024

Save management only a few dollars in accounting costs,

but would substantially harm the union.

The majority thus allows individual anti-union modifi-

cations that save management little to lurk in court-

approved proposals. The majority thereby disrupts the

scheme of section 1113, since it effectively eliminates the

word ‘‘necessary’’ from subsection (b)(1)(A) and leaves

only the good faith and balance of the equities clauses to

protect the union. This was not the result Congress in-

tended when it overruled Bildisco, which said that only

balancing the equities was required. The majority’s rule

also violates Truck Drivers Local 807 v. Carey Transpor-

tation, Inc., 816 F.2d 82 (2d Cir. 1987), in which we held

that a management proposal must be limited to ‘‘neces-

sary, but not absolutely minimal’’ modifications, since un-

der the majority’s rule, even modifications that do not

Significantly help the reorganization are permitted. The

majority suggests that the union could avoid an outra-

geous modification even if it refuses to negotiate by prov-

ing that it was made ‘‘in bad faith, in an effort to

Stalemate negotiations.’’ However, this suggestion puts

the cart before the horse by ignoring the statutory require-

ment that a necessary proposal (subsection (b)(1)) precede

the good-faith negotiations required by subsection (b)(2).

Moreover, management may make a good-faith mistake in

thinking its proposal is necessary. The good-faith provi-

sions therefore do not substitute for the necessity require-

ment.

If *..er cases nonetheless follow the majority’s first al-

ternative holding instead of its second, I would hope that

they would make the best of a bad rule and interpret ‘‘ne-

gotiation’’ broadly. It should be enough for a union to (1)

state the modifications to which it objects, and (2) give a

JU0025

short explanation of its objection. For example, the union

might say ‘‘We object to elimination of dues check-off be-

cause it will hurt our independence and financial security,

and management hasn’t shown that it will save significant

amounts of money.’’ Once the union has begun negotia-

tions, the usual Carey Transportation standard for

“‘necessary’’—and not the majority’s alternative—would

apply.

B. Necessity

Based on the record before us, I also disagree with the

majority’s second alternative holding that ‘‘Even if we

were to view the proper focus to be on the single element

of eliminating priority, we would conclude that- Royal

demonstrated that it was a ‘necessary modification’ as

. . . defined in Carey Transportation.’”* (p. 12). Priority

is SO important to the union that making its elimination

**necessary’’ requires a stronger showing than has been

made here.

Priority—called seniority in most businesses—has be-

come one of the cornerstones of American unionism. Sen-

iority is the most important, and often the only, equity

workers have in their company. It is one of the chief pro-

tections a worker has from management’s vagaries, and it

preserves the self-esteem and financial security of workers

who have devoted their lives to building a company. As

the Supreme Court has said, ‘‘ ‘More than any other pro-

vision of the collective[-bargaining] agreement . . . sen-

iority affects the economic security of the individual

4 As discussed in Part III, I would not reach these issues because the

record is unclear about whether the proposal asked for the tocal elimi-

nation of priority. Nonetheless, in order to register my disagreement

with the majority on these matters, I will assume (as it does) that the

proposal sought the total elimination of priority.

oo 000026

employee covered by its terms.’ ’’ Franks v. Bowman

Transportation Co., 424 U.S. 747, 766 (1976). Priority is

so important that the union president in this case said he

was willing to ‘‘take whatever wage cut is necessary to

keep this firm in business, but I don’t think that we should

be asked to give up priority for that purpose.”’

Given the generally recognized importance of seniority

to unions, the union’s refusal to negotiate as long as man-

agement sought to eliminate priority was understandable,

even if unwise. More importantly, on the record in this

case, the bankruptcy court could not have found that to-

tally eliminating priority would have generated so much

savings relative to the harm to the union—in the context of

the savings necessary and the alternatives available—that

the proposal could fairly be called ‘‘necessary.’’

The evidence was sufficient to support a finding that a

limited intrusion into priority was necessary, but there was

no specific, factual information proving that priority had

to be totally and permanently eliminated. The bankruptcy

court, quoted with approval by the majority (p. 14), ex-

cuses this failure with generalities like ‘‘A debtor can live

on water alone for a-short time but over the long haul it

needs food to sustain itself and retain its vigor,’’ 62 Bankr.

at 418, and ‘‘Projections are necessarily speculations

about the future and are an art,’’ 62 Bankr. at 407, but

truisms do not substitute for evidence. Although I agree

with the majority that we should ‘‘not hold Royal to show

the necessity of every conceivable future use of the flexibil-

ity’? created by eliminating priority, I disagree that ‘‘it is

enough that the bankruptcy court found it needs that flexi-

bility.’’ (p. 15). To be upheld on appeal, the bankruptcy

court’s finding must be based on evidence.

000027

Moreover, the bankruptcy court did not find that totally

eliminating priority was necessary. The majority admits

that the court did not make its findings explicit, but says

that ‘‘such a finding is implicit.’’ (p. 12). I disagree. The

bankruptcy court stated that ‘‘The Union has questioned

the need for any alteration of existing priority . . . rules.

The court is persuaded that . . . some intrusion on the

priority system was not inherently unreasonable’’ since

‘*{t]he Debtor will in the future be faced with enormous

competitive pressure which will require it to have maxi-

mum flexibility, including with respect to utilization of its

unionized labor, in order to mold and adapt in a changing

business environment.’’ 62 Bankr. at 417, 416-17 (empha-

sis added).

The first finding—that ‘‘some intrusion on the priority

system was not inherently unreasonable’ —does not even

approach a finding that tofa/ elimination of priority is nec-

essary. The second statement—about the ‘‘enormous com-

petitive pressure’ requiring ‘‘maximum flexibility’’—is so

general as to be meaningless. It could be said of any bank-

rupt company, since presumably a company would not be

bankrupt without ‘‘enormous competitive pressure’’ and

since management always wants to have ‘‘maximum flexi-

bility.’’ Indeed, one of a union’s key functions is to de-

crease management’s flexibility by giving workers a role in

their own work, and increasing flexibility is often code for

ending unionization. Similarly, under the bankruptcy

court’s reasoning, almost any bankrupt company could

eliminate seniority without proving any particularized

need. Congress did not intend Section 1113 to be manage-

ment’s tool for eliminating seniority provisions. Instead,

Congress required the employer to prove specific facts

showing that the specific relief requested is necessary in its

particular circumstances. On this record, the employer

009028

never met its burden, the bankruptcy court applied the

wrong standard and, in any event, did not make particu-

larized findings. At the very least, I would remand for fur-

ther factual findings.

III. Remand for Factual Clarification

Other aspects of the proceedings below also suggest

that, in any event, a remand would have been appropriate

and that this is the wrong occasion on which to announce a

new interpretation of the necessary-proposal requirement.

A. Uncertainty About Proposal’s Content

The majority opinion seems to be premised on the

assumption—shared by Royal and the union—that the

proposal at issue here is the single set of modifications

Royal asked for orally on March 18.° This premise was not

shared by the bankruptcy court, which seems to have con-

sidered a variety of suggested modifications under the ru-

$ Royal’s application for rejection was evidently prepared before the

March 18 discussion with the union, since the aeslication-states “A

meeting has been scheduled for Tuesday morning, March 18.’’ Daniel

Haberman, chairman of Royal's board, testified about the March 18

meeting as follows:

The union’s lawyer asked for our proposal, and what happened

was, the two-part answer is, one, we gave them—Mr. Rosen [Roy-

al’s lawyer] said that our March 3rd written proposal. . . that our

March 3rd written proposal as amplified by what we told them ver-

bally at the March 18th meeting—in other words, mosi of this is in

the March 3rd written proposal—excuse me--in the March 3rd writ-

ten request that we gave to the union on the afternoon of March

3rd. In addition to that the other items we told the union verbally in

the March 18th meeting. The problem that we had there was—the

problem that I have, that afternoon we were going to a conference

with Judge Abram on the interim relief and, so, the proposal was a

combination—most of it was in writing, that is, and was accepted

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bric ‘‘proposal,’’ but did not isolate any single proposal to

determine its necessity. 62 Bankr. at 410 n.15 (‘‘Analysis

of the differences [between the various proposals] is not

material to the motion.’’) This was error, because the stat-

ute envisions that the bankruptcy court scrutinize a single

proposal. Because the bankruptcy court did not have a°

particular proposal in mind, it could not have determined

the necessity of a particular proposal, and because I do not

believe that we should evaluate a proposal without the

benefit of the bankruptcy court’s assessment of it, I would

at the very least remand for consideration of a single pro-

posal. However, even if I were inclined to review the

March 18 proposal in the first instance, I could not do so

because the exact content of that proposal is not in the

record.

As the majority states, both sides have focused on the

modification relating t® priority. However, because there

was no contemporaneous, written record of the March 18

proposal and because the bankruptcy court did not make

clear findings about that proposal’s content, see 62 Bankr.

at 410 n.16, it is not clear from the record whether the

mention priority at all, see 62 Bankr. at 408-09 n.9, and

when the bankruptcy judge asked ‘‘Is the proposal that the

debtor eliminate seniority issues altogether or that the

debtor obtain a one-time . . . window,’’ the debtor’s

chief negotiator answered ‘‘it’s somewhere in the middle

. . . . lL anticipate that there will be a one-time problem of

excessing 5 or 6 people. . . [but] I will then reserve the

right to again go by way of merit selection rather than sen-

iority. . . . Atno time has the debtor ever asked for what

you describe as a cart(e] blanche right to elimi[na]te sen-

iority. . . . Most of the aspects that seniority has we're

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000030

not asking for change.’’ Cf. 62 Bankr. at 413 (manage-

ment request in January to eliminate five employees, not

all of seniority). If the proposal had clearly asked for a

small, temporary incursion into priority, I might feel dif-

ferently about the necessity of the modification, as indi-

cated above. However, on the record before us I cannot

tell what the proposal was and therefore cannot judge

whether it was necessary.

Analyzing the proposal as a whole, which the majority 1

does, is similarly impossible because one cannot determine |

the proposal’s total savings without knowing what the spe-

cific modifications are and how much each will save. Be-

cause this factual issue is at the heart of the appeal and

because it is a basic principle of federal jurisprudence that

courts pass on legal questions only in concrete factual situ-

ations, I would not use this case to announce a new inter-

pretation of the necessary proposal requirement. Instead,

I would remand for factual findings with a suggestion that

bankruptcy courts in the future not consider rejection ap-

plications unless accompanied by a copy of the clear, writ-

ten, dated proposal by management to a union.

B. Timing of Proposal

There is another assumption shared by the parties and

the majority but not by the bankruptcy court. The former

apparently assume, and I tentatively am inclined to agree,

that the proper proposal to evaluate is one made ‘‘[s]ubse-

quent to filing a petition and prior to filing an applica-

tion,’’ § 1113(b)(1) (emphasis added), which in this case is

between March 14 and March 19. However, the bank-

ruptcy court said it would consider the proposal ‘‘to the

extent the proposal was made prior to the commencement

of the rejection hearing,’’ 62 Bankr. at 407 (emphasis

added), which was May 8. In so holding, the court relied

BRP SNE ROR SE To i Ste CLARE

000031 |

on section 1113(c), which says that ‘‘[t]he court shall ap-

prove an application for rejection . . . only if the court

finds that—(1) the trustee has, prior to the hearing, made

a proposal that fulfills the requirements of subsection

(b)(1).’’ (emphasis added). Under this reading of the stat-

ute, management can continue making proposals all the

way to the rejection hearing, and only the last one is sub-

ject to the necessity test. The question is important be-

cause before we can evaluate the necessity of a proposal

we must know its terms. Since the issue was neither briefed

by the parties nor ruled on by the majority, I do not ex-

press a firm view. I note the issue for the future and to

point out the fundamental confusion in the record, confu-

sion that should have precluded the majority from even

considering whether the total elimination of priority was

necessary.

For the reasons stated above, I dissent from the majori-

ty’s unnecessarily broad decision that conflicts with the in-

tent of Congress as expressed in Section 1113. I would

either reverse or, at the least, remand for clarification.

APPENDIX B

000032

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

see e eee eee eeemeeoeeoeoen = X

IN re ROYAL COMPOSING:

ROOM, INC., : 86 Civ 4849

: (JFK)

Debtor. : OPINION and

: ORDER

Se ee SS e2eeeeesooooooeana = xX

APPEARANCES:

For Appellant New York Typographical

Union No. 6:

Vladeck, Waldman, Elias & Engelhard, P.C.

New York, New York

Of Counsel: David Silberman

AFL-CIO

Washington, D.C.

For Appellee:

Michael Hess

Gelberg & Abrams

New York, New York

JOHN F. KEENAN, United States District

Judge

000033

JOHN F. KEENAN, United States District

Judge

Background

New York Typographical Union No. 6

("Local 6”) appeals from an order of the

Bankruptcy Court filed by Bankruptcy Judge

Prudence B. Abram. Judge Abram granted the

motion of the Debtor, Royal Composing Roon,

Inc., (“Royal”) for approval of its

rejection of its collective bargaining

agreement with appellant. For the reasons

set forth below, the Court affirms Judge

.Abram’s order.

Facts

This case arises in a_ changing

industry. The appellee is an advertising

typography company, and one of the last

unionized shops. For most of this century,

the advertising typography industry relied

extensively on the linotype machine.

J00034

However, the past decade has seen the

industry turn increasingly to the latest

computer technology.

It was in this corporate environment

that Royal was created in 1975 as a result

of the merger of two old _ unionized

typesetting companies. Royal was a party

to a collective bargaining agreement with

Local 6. Although the company was

profitable during its first several years,

in 1982 its financial condition worsened.

In that year, the annual gross revenues

decreased by two million dollars, and it

suffered a net loss of $545,236. Over the

following three years, Royal lost over

$752,900.

When confronted with these

difficulties, Royal began to cut expenses.

In 1983, Royal sharply cut the compensation

of its principal executives, it froze

salaries of salesmen and middle management

foremen, and it eliminated company

eee

V00035

automobiles, along with other’ savings

efforts. In 1985, Royal moved its plant to

a smaller location to avoid a rent

increase. By the end of that year, Royal

reduced the number of non-Local 6 employees

from 48 to 40.

As of the end of 1985, Local 6 had

not yet made any sacrifices or concessions.

It became increasingly urgent to obtain

some savings from the union when Royal lost

its largest customer, Doyle Dane Bernbach

Inc., at the start of 1986. Royal was

unable to convince the union to forego a 3%

wage increase that had already been agreed

to, nor would the union alter its

arbitration demands.

On March 14, 1986, Royal filed its

petition for reorganization under Chapter

11, section 301 of the Bankruptcy Code.

Royal then sought to reject its collective

bargaining agreement under section 1113(a).

However, pursuant to section 1113(b) (1) (A),

V00036

before rejecting the agreement, Royal was

required to make a proposal to the union,

“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 affected parties are treated fairly

and equitably.” On March 18, a meeting was

held between Royal and Local 6 at which the

proposal was made. The proposal included a

reduction of benefits, changes in work

rules, the elimination of the scheduled

wage increase, and the elimination of the

union’s right to arbitration as the way to

change the contract. The union rejected

the proposal and did not negotiate. Judge

Abram noted that, “”[{t]he small number and

short length of the meetings had is

attributable to the union... . At no

time prior to May 5, 1986 did the union

make a counterproposal, comment item by

000037

item on the Debtor’s proposal or the

Debtor’s financial situation, or state any

reasons why it found the Debtor’s request

to be unfair or inequitable.” In re Royal

Composing Room, Inc., 62 B.R. 403, 409

(Bankr. S.D.N.Y. 1986). On May 5, 1986 the

Bankruptcy Court held a final pretrial

conference and, for the first time, the

union made a counterproposal. Judge Abram

found the proposal unacceptable. See id.

at 410. On May 8, the trial commenced and

on June 16, Royal’s section 1113 motion was

granted. This appeal followed.

DISCUSSION

Focusing on section 1113(c) (1),

Local 6 raises two arguments on appeal:

(1) the Bankruptcy Court did not apply the

proper definition of ‘"necessary” under

section 1113, and (2) Royal’s proposal did

not treat all affected parties fairly and

equitably. Both positions are unavailing.

006038

At the outset, it should be noted

that a bankruptcy court’s interpretation of

the statute is a legal conclusion subject

to plenary review. Truck Drivers Local 807

v. Carey Transportation Inc., 816 F.2d 82,

88 (2d Cir. 1987). If the bankruptcy

court’s legal interpretations are correct,

then its factual determinations can only be

disturbed if they are clearly erroneous.

Id. In this case, Judge Abram’s opinion

passes muster.

The Second Circuit has' indicated

that the term “”necessary” contained in

section 1113 (b) (L) (A) does not mean

“‘essential’ or bare minimum” See Carey

Transportation, 816 F.2d at 8:9. In

rejecting the Third Circuit’s approach

which equated necessary with essential, see

Wheeling-Pittsburgh Steel Corp. v. United

Steelworkers, 791 F.2d 1074, 1088 (3d Cir.

1986), the Second Circuit ruled that, "the

necessity requirement places on the debtor

V00039

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.” In substance, this is the

analysis employed by Judge Abram. Indeed,

the Second Circuit in Carey Transportation

quoted with approval Judge Abram’s

description of why a broader definition of

“necessary” was required. “As the Royal

Composing Room court phrased it, ’A debtor

can live on water alone for a short time

but over the long haul it needs food to

sustain itself and retain its vigor.’”

Carey Transportation, 816 F.2d at 89-90

(quoting 62 B.R. at 418).

Applying the standard of necessity

later endorsed by the Second Circuit in

Carey Transportation, Judge Abram found

that Royal had, “established that it had in

good faith attempted to negotiate for

009040

necessary changes but had been unsuccessful

because of the Union’s unwillingness to

engage in serious discussions.” 62 B.R. at

618. The record supports this finding.

Local 6 was unresponsive and dilatory in

the face of management’s financial

condition and resulting proposal.

Likewise, Judge Abram was correct in her

analysis of Royal’s proposal. She found

that Royal had cut non-union management and

executive salaries, eliminated trade

association memberships and even reused old

doorknobs. 62 B.R. at 412. During this

time, union labor costs were the only

expenses not cut. Id. - It cannot be

concluded that these findings were clearly

erroneous. The correctness of Judge

Abram’s legal conclusion is bolstered by

the Second Circuit’s statement in Carey

Transportation that courts “”must consider

whether rejection [of a collective

bargaining agreement] would increase the

Lp LN A AT RE LI TL

UC0041

likelihood of successful reorganization.”

Carey Transportation, 816 F.2d at 89. This

Court cannot envision Royal being able to

successfully reorganize absent at least

enforcement of its proposal under section

1113(b)(1) (A). Rejection clearly increases

the likelihood of successful

reorganization.

Local 6 further asserts that Royal

did not satisfy the statutory requirement

that under the pre-petition proposal, “all

creditors, the debtor and all affected

parties are treated fairly and equitably.”

Judge Abram correctly found that Royal “had

spread the burden of financial sacrifice.”

62 B.R. at 411. As noted earlier, Royal

cut costs in many ways, including a

decrease in executive compensation, the

rescinding of raises and freezing of

salaries of salesmen and middle level

management, the elimination of company

cars, and the moving of its premises to

- 10 =

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000042

smaller quarters. The union’s wages were

neither frozen nor cut. It is clear that

the pre-petition proposal merely sought “to

spread the burden of financial sacrifice” a

little further, so that it reached the

union. Carey Transportation again

underscores the wisdom of Judge Abram’s

opinion. The Second Circuit observed that

a debtor need not show that managers and

non-union employees have their benefits cut

to the degree union benefits are cut. 816

F.2d at 90. In this case, the union’s

benefits were the last to be cut, and it

certainly was not the only constituency in

Royal to feel the financial pinch. Royal’s

proposal satisfied the statute’s

requirement of fairness and equity.

CONCLUSION

The Bankruptcy Court properly found

the pre-petition proposal satisfied the

U00043

requirements section 1113(b)(1)(A), and

that the rejection of the collective

bargaining agreement was. proper. The

opinion of Judge Abram is hereby affirmed.

SO ORDERED.

Dated: New York, New York]

September 29, 1987

John F. Keenan /s/

JOHN F. KEENAN

U.S.D.J.

APPENDIX C

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

Se eeeseeeooooooooooaoaone xX

IN re ROYAL COMPOSING:

ROOM, INC., $ No. 86 B 10435

$ (PBA)

Debtor. :

Se ee eeeooeooooooooooeae] » 4

APPEARANCES:

GELBERG & ABRAMS

Attorneys for Debtor

711 Third Avenue

New York, New York 10017

By: Michael D. Hess, Esq., and

Stanley Bernstein, Esq., of Counsel

MILGRIM THOMAJAN JACOBS & LEE

Attorneys for Debtor

405 Lexington Avenue

New York, New York 10174

VLADECK, WALDMAN, ELIAS & ENGELHARD, P.C.

1501 Broadway

New York, New York 10036

By: Andrew S. Hoffman, Esq., of Counsel

DECISION ON DEBTOR’S MOTION FOR APPROVAL

OF REJECTION OF COLLECTIVE BARGAINING

AGREEMENT

ABRAM, Prudence B., U.S.B.J.:

A struggle for survival by

apparently endangered species is at the

RN Sb mr He os Bircy

V00045

core of the disputes raised by this motion

by a debtor to reject ae collective

bargaining agreement. The debtor, Royal

Composing Room, Inc. ("Royal"), is one of

the iast unionized advertising typography

shops in New York City. The union, New

York Typographical Union No. 6 ("Union"),

has seen its membership decline rapidly

Since 1975, when virtually all advertising

typography shops were uinionized. The

Union’s 1975 multi-employer contract with

the Printers League, which includes

financial printers in addition to

typographers, will expire in September 1989

and prospects for renewal are uncertain.

Advertising typography itself is in the

midst of radical change. Dramatic

technological changes since 1976 have

converted an industry that for the previous

sixty years had relied on the linotype

machine to one that relies today on the

latest computer technology. The print

ue at bate ener

V00046

advertising industry itself began to change

in the 1950’s with the advent of

television. Advertising agencies, the

prime customers of advertising

typographers, are no merging to form mega-

agencies and acquiring the equipment to

perform typography work themselves.

The Debtor’s chapter 11 petition was

filed on March 14, 1986 The seven days of

trial on the Debtor’s rejection motion

which was filed on March 19, began on May 8

and concluded May 28. Coincidentally, the

Third Circuit issued its decision on the

appeal from an order permitting rejection

of a collective bargaining agreement in the

Wheeling-Pittsburg Steel Corporation

Chapter 11 case on May 28.

Both sides have appealed to this

court’s sense of equity, one seeking mn

have the application denied, the other

seeking to have it granted. Several

centuries ago, John Selden wrote:

000047

"Equity is according to the

conscience of him that is

Chancellor, and as that is

larger or narrower, so is

equity. ‘Tis all one as if

they should make the standard

for the measure we call a

‘foot’, a Chancellor’s foot;

what an uncertain measure this

would be! One Chancellor has a

long foot, another a= short

foot, a third an indifferent

foot. ‘Tis the same thing in

the Chancellor’s conscience."

For the reasons which follow, the court has

determined that it should grant’ the

Debtor’s application for rejection of its

collective bargaining agreement. This

court is powerless to impose contractual

modifications on the parties, even if that

were the equitable outcome. It can only

permit rejection or not. After rejection,

a debtor must still bargain with the union.

If the changes this Debtor imposes after

rejection are unacceptable, the employees

are free to resign or strike.

The tragedy of this case is that

despite the high stakes the Debtor and the

jenna ik PBN BAIS AERA ANE ARR a AUER SPI We Sight de RMI MEE NAGS AS rch

U00048

Union have been unable to negotiate a

solution either before the trial started or

thereafter. The Debtor made it clear that

it would close its doors if rejection were

not permitted because of its inability to

obtain necessary modifications from the

Union. The Union made it clear that the

workers would in all likelihood strike if

rejection were permitted, which strike

alone could force the Debtor to close

permanently. In either case, the jobs of

the present 31 Union workers and 40 non-

union workers would be lost, with resulting

hardships on themselves and their families?

and possible losses to creditors, and the

shareholders will lose a business to which

they have devoted the whole of their

working lives. Reasonable people faced

with these stakes should have been able to

effect a workable compromise.

Code {1113 provides no mechanism for

the court to appoint anyone to assist the

000049

parties in their negotiations or to mediate

their disputes. Until Congress provides

for the appointment of a mediator in the

event of a motion for rejection in a

Chapter 11, the negotiations remain in the

hands of the debtor and the union.”

The legislative history of code

{1113 contains repeated references to the

necessity for negotiations between the

debtor and the union before the court can

act to permit rejection.

"In sum, *** this conference

report, consistent with the

intent of Congress in the

National Labor Relations Act,

provides that the company must

try to negotiate with employees

to work out the changes

necessary to prevent the

company from failing. The

legislation also reimbodies the

principal of the NLRA by re-

quiring the company to bargain

in good faith." Statement of

Senator Moynihan at XxX-91.

“After the proposal is made,

and until a hearing on the

motion to reject, the parties

must bargain in good faith.

This provision places the

primary focus on thr private

collective-bargaining process

-6-

Pee ee |

V00050

and not in the courts. *** The

amendments also prohibit the

trustee from unilaterally

altering or terminating the

labor agreement prior to

compliance with the provisions

of the Section. This provision

encourages the collective

bargaining process, so basic to

federal labor policy." Senator

Packwood at XX-83~-XX-84.

"The phrase ‘without good

cause’ in subsection (c)(2) of

new Section 1113 kak is

intended to ensure that a

continuing process of good

faith negotiations will take

place before court involvement

eee, In deference to the

overall policy of the provision

which is to encourage the

parties to reach their own

agreement through collective

bargaining, the court in

framing any such relief may not

go beyond the proposal made by

the trustee pursuant to

subsection (b) (1) (A)."

Representative Morrison at XX-

33-XX-34.

"This provision will require

negotiations to attempt to save

both the labor contract and the

business prior to court

adjudication to reject the

contract. **x*k The business

must make an offer to its

employees’ union

representatives [that strive to

both preserve the collective

bargaining agreement and permit

a successful reorganization. ]

VO0051

That offer should make ‘those

necessary modifications’ in the

contract as ‘are necessary to

permit the reorganization of

the debtor and assures that all

creditors, the debtor and all

the affected parties are

treated fairly and equitably.’

The intent of this provision is

to allow the business to make

whatever changes in the

collective bargaining agreement

are reasonably necessary to

ensure the likelihood of a

successful reorganization. The

provision emphasizes that the

inevitable balancing that will

go into this attempt to save

both the business and the labor

contract must reasonably assure

the fair and equitable

treatment of all those affected

by the reorganization effort.

This fair and equitable

treatment language was intended

by the conference to _ ensure

that the type of balancing of

all the equities that takes

place when the court finally

rules on rejection also takes

place during these preliminary

negotiations." Senator Hatch

at XX-58 and XX-60-61.

(Emphasis added).

This court eschews the talismanic

nine-step analysis of Bankruptcy Code {1113

first used in In re American Provision Co.,

44 B.R. 907 (Bankr. D. Minn. 1984).

000052

Instead, this court looks to the three

interdependent findings required by Code

{1113(c) .4 See Gibson, New Law on

Rejection of Collective Bargaining

Agreements in Chapter 11: An Analysis of

4a U.S.C. (22133, S58 Am. B.L.J. 325, 335

(1984) (hereafter "Gibson"). Compare In re

K&B Mounting, Inc., 50 B.R. 460 (Bankr.

N.D. Ind. 1985). The court, however,

reverses the usual order in which the three

are considered. Although code {1113(c) (1)

starts with the debtors’ proposal, this

court declines to make the _ debtor’s

proposal itself the first and foremost

topic of consideration as placing such

primacy on the proposal inhibits, rather

than fosters, the prehearing negotiation

process envisioned by Congress as the facts

of this case make plain. If the first

focus is the debtor’s_ proposal, the

rejection process becomes a game of Russian

roulette in which the union will stand mute

fie Jaap nlibee israel yytsy ‘ nin AS TENA MELE TSS TE TS OER 5 dha ae GY

000053

during negotiations in the expectation that

the court is apt to find some aspect of the

debtor’s proposal unnecessary or

inequitable.° The tactical odds heavily

favor the union in that game as few Chapter

11 debtors have the capacity to make a

proposal "perfect" without the refining

fire of a union’s prehearing critique. The

necessity for the Debtor’s proposal and the

equitability of the sacrifice are matters

which must be first tested in the crucible

of prehearing negotiations. | Indeed, the

principal purpose of prehearing

negotiations is to discuss modifications to

the debtor’s proposal.

The court is to consider a debtor’s

proposal only to the extent the proposal

was made prior to the commencement of the

rejection hearing. Code {1113(c)(1). It

is only sensible that the court have a

fixed point in time to look to as otherwise

the court would be trying to deal with a

-10-

— ee

SR ee eee ee eke ee

=. Te

000054

constantly moving target as a debtor

altered its proposal during the course of

the trial. Likewise, a union’s prehearing

position should be the focus of the trial.

For the court to judge a debtor’s proposal

on grounds articulated by a union for the

first time at trial is to permit the union

to do that prohibited to the debtor and

would defeat Congressional intent that

prehearing negotiations be fostered.

A union must articulate and discuss

in detail with a debtor during’ the

prehearing negotiations its reasons for

declining to accept the debtor’s proposal

in whole or part. If prehearing, a union

has assigned no reason for its refusal to

accept a debtor’s proposal, it has perforce

refused to accept the proposal without good

cause under Code ({1113(c) (2).

It is impossible to conceive of a

case in which some aspect of the debtor’s

projections as to its future financial

-ll-

000055

needs, the allocation of burden among the

various parties, or some item in the menu

of modifications in the union contract

proposed by the debtor could not be viewed

as unnecessary, inessential or inequitable.

Projections are necessarily speculations

about the future and are an art, rather

than a science. The factors that might

influence the equities of the allocation of

burden or the necessity for a proposal are

on the details of the Debtor’s proposal are

infinite. Wage cuts can be traded for

benefit cuts, as was done by the Debtor

here. Holidays and working hours can be

traded off.’ Only the negotiating process

can reveal which of a debtor’s proposals on

the large issues of how much aggregate

relief is required and how much should be

apportioned to the union, as well as on the

smaller issues of how the union contract

cuts should be made, are appropriate or

-12-

V00056

ill-conceived or should be modified and how

the difficult problems presented by the

economic realities of the Debtor’s

situation can and should be resolved.

The balance of the equities, see

Code {1113(c)(2), clearly favors rejection

when it is apparent that a Debtor is in

need of substantial relief under a union

contract and the bargaining process has

failed to produce any results and is

unlikely to produce results in the

foreseeable future. Bluntly stated, a

stonewall by the union favors the grant of

the Debtor’s motion for rejection. Upon

rejection, the negotiation process will be

revitalized by the alteration in the

positions of the players.

In this case, the court finds the

Union’s posture was essentially a

stonewall. Royal initially sought relief

from the Union in May 1985. That request

was denied. Thereafter, upon learning that

-13-

V00057

it would lose a major client in June 1986,

Daniel Haberman, the Chairman of the Board

of Royal, immediately sought to and did

meet on January 17, 1986 with Bertram

Powers, President of the union to request

"massive" and “immediate" relief under the

Union contract. No relief was granted.

Shortly afterwards Mr. Haberman flew to

Colorado Springs to discuss the situation

with the International. Another meeting

occurred on February 12, 1986 at which

Royal again unsuccessfully requested

relief.

The Debtor attempted to deal with

the political problems faced by the Union

by resigning the following day, February

i3, from the Printers’ League and

withdrawing the authority of the Printers’

League to represent Royal in the

negotiation or administration of the

collective bargaining agreement. The

Debtor recognized that resignation did not

-14<-

: . tke td mae

| aia hans rh CL Nine Nha AAT RNIN II

V00058

relieve it of its obligations under the

existing contract. The Debtor was seeking

to free the Union to negotiate with the

Debtor directly without creating

unnecessary problems for the Union with

other employers in the multi-employer unit.

At the time the Union declined to recognize

Royal’s resignation, although at trial the

Union’s attorney conceded that the Debtor

was free to resign from the Printers’

League. ®

Royal presented a written proposal

for relief at a meeting with the Union on

March 3, 1986.” Prior to the March 3

meeting, the Union did request relief for

Royal from the BAP Fund obligation, and the

BAP Fund trustees, of whom Mr. Powers was

one, subsequently agreed that it would

relieve Royal of about half of its BAP Fund

contribution, subject to the BAP Fund

accountant inspecting Royal’s books and

records. At the March 3 meeting, Mr.

-15-

V00059

Powers suggested that Royal create an

employee stock option plan but = again

declined to consider the Debtor’s proposal.

After the Chapter 11 petition was

filed on March 14, the Debtor immediately

sought to meet with the Union but the Union

did not meet with the Debtor until

March 18, the same day the Debtor obtained

an order to show cause fixing March 21 as

the day for a hearing on the interim relief

portion of its application to reject the

collective bargaining agreement. ++ After

the March 21 hearing at which the Union did

not oppose the request for interim

2 the Union did not meet with the

relier,!

Debtor again until April 17. There were no

meetings after that. None of the meetings

lasted more than an hour or two.

The small number and short length of

the meetings had is attributable to the

Union. The Debtor was’ continuously

available for and sought other meetings.

VG0060

It is a sad commentary on the prehearing

negotiation process in this case for the

court to note that the parties spent almost

ten times more time in court litigating

this matter than in post-petition

prehearing negotiations (30 hours compared

to about 3.5 hours). At no time prior to

May 5, did the Union make a

counterproposal, comment item by item on

the Debtor’s proposal or the Debtor’s

financial situation, or state any reasons

why it found the Debtor’s request to be

unfair or inequitable. ??

On May 5, a final pretrial

conference was held to discuss the trial

scheduled to commence on May 8. During the

pretrial conference, the Union through its

attorney for the first time made a

counterproposal. The counterproposal did

not conform to the format of or respond

directly to Royal’s request.

Notwithstanding the lack of comparability,

-17-

QO0061

it is evident that the ’s counterproposa1?*

provided significantly less economic relief

to the Debtor than the interim relief which

had been granted on March 21 as it did not

relieve the Debtor from 2 of the 4 benefit

funds and treated any wage cut as a loan.

At trial, Mr. Powers testified that

he viewed the Debtor’s proposal?° as an

aggregate and responded to it as an

aggregate. Mr. Powers is absolutely

opposed to any alteration of the existing

priority system established by the Union

contract and believes that priority is the

rock-bed on which American unionism is

founded. Because the Debtor’s proposal

included requests for modifications of the

priority system, Mr. Powers declined to

respond to particular items of the Debtor’s

proposal. ?®

When questioned regarding

specific aspects of the Debtor’s proposal

Mr. Powers said that labor negotiating

strategy generally does not involve

-18-

V00062

negotiating individual points separately

from the entire package. Mr. Powers

followed that general strategy in this

case. ;

The Union’s strategy of focusing on

the package would be appropriate if the

bargaining were over the amount of the

relief the Debtor required or the

proportion of the total relief needed to be

allocated to the Union. Once the parties

agree on the total and relative amounts,

then the focus of the bargaining can turn

to the details of modifications in the

union contract necessary to produce that

amount. At trial, it was apparent that the

Union does not agree on the total magnitude

of relief the Debtor needs in order to

remain competitive in the industry or on

how much of that relief should come from

17 the Union raised issues at

the Union.

trial respecting whether the sacrifices

were being equitably distributed. For

VO0063

example, at the mid-point of the trial the

Union brought out for the first time that

Mr. Haberman is on the Debtor’s premises

only once a month on average.

It is the Union’s view that the

Debtor escalated its demands after the

Chapter 11 filing to include the priority

modification requests and refused to

withdraw them because the Debtor knew the

Union was unequivocably opposed to any

change in the priority system. At trial,

the Union sought to show that Mr. Haberman

was motivated by a desire to create a model

union contract. 18

Although Mr. Haberman

conceded his interest in a model contract,

his main motivation has been the salvage of

Royal’s future. This court finds that the

‘Debtor did not intentionally sabotage the

negotiations by requesting priority changes

and that the Debtor sought modifications in

good faith which it believed were necessary

-20-

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a AY ye heat tea Res Oe oe ae a .

wss ers pala sgt MAR yas a BS) peqpere PAIN,

V00064

and to which it believed the Union might

and could agree.

In addition to the legislative

intent discussed previously, both equity

and conservation of judicial resources

favor an interpretation of Code (1113(c)

that promotes effective prehearing

negotiations. Equity requires it in order

to reduce the possibility of variable

outcomes resulting from differences in

individual judges’ points of view on

necessity and fairness. Judicial economy

requires it in order that trials of these

motions do not consume the court’s docket.

This court does not suggest that it may

abdicate its duty to consider the general

necessity for and fairness of the Debtor’s

proposal. The court, however, should not

be the primary object of the parties’

advocacy. Rather the parties must be

encouraged to excell at advocacy in the

prehearing negotiation process with the aim

-21-

VO0065

of reaching a consensual solution. As the

parties refine their prehearing focus, so

must the court refine its focus at trial.

When a prehearing stalemate results, the

court must focus its considerations at

trial more finely. In the case of a

stonewall, however, when the court turns to

the debtor’s proposal itself under

Code {1113(c)(1) it must focus on the

larger picture: whether the Debtor has

shown any necessity for modifications of

the magnitude it proposed, whether it made

its books and records and any other

relevant information on which it based its

proposal available to the Union and whether

it attempted in good faith to confer with

the Union to reach mutually satisfactory

modifications. This court finds that Royal

has met these burdens.

Royal established at trial it had

need for substantial relief under the Union

contract and that it had spread the burden

-22-

VOCO6E

of financial sacrifice. A review of the

Debtor’s financial history shows that the

Debtor filed its Chapter 11 petition

virtually at the last moment its tangible

assets were sufficient to pay its

liabilities. Royal’s 1985 year end

statement reflects a loss of $225,080 on

‘sales of $5,945,215. The 1985 balance

sheet shows assets of $2,575,890, of which

goodwill is $897,896 or 34.9%.??

| Shareholders’ equity is stated to be

$561,726.

Goodwill, although a legitimate

balance sheet item, does not represent a

tangible asset. In Royal’s case, the

goodwill item reflects the accounting

treatment of a 1976 merger. The only

liquidation value that can be ascribed to

goodwill is the possibility the Debtor’s

name might have some unknown value. For

the three years prior to 1985, goodwill and

shareholders’ equity were approximately

-23-

v00067

equal. In 1985, however, because of the

erosion of shareholders’ equity caused by

operating losses, goodwill exceeds

Shareholders’ equity by 59.8%. Liabilities

exceeded tangible assets at the end of 1985

by $336,170.

The Debtor’s liabilities as

reflected on its 1985 statement total

$2,014,164, comprised of current

liabilities (inclusive of the current

portion of long term debt) of $1,105,794,

long term debt of $689,620, and

subordinated long term debt of $218,750 (or

$373,750, if the current portion is

included). The long term debt, including

the current portion, is secured by the

Debtor’s accounts receivable, work in

process and fixed assets, including

equipment. 7°

Royal is plainly in need 0of

financial rehabilitation. Its operations

Peggy

have been unprofitable since the economic

-24-

V00068

slump in 1982 when its’ sales’ fell

$2 million in one year. Its sales base is

eroding, primarily because of Royal’s

inability to be price competitive.

Professor Ralph Gray, Professor of

Economics at DePauw University, testified

at trial that Royal is an _ economic

anachronisn. He caused a survey to be

conducted in March 1986 which revealed that

type buyers are extremely cost conscious

and that the large number of non-union

producers has driven prices down to the

point where the market price is below the

cost per unit of a union shop such as

Royal. Professor Gray reviewed the two

strategies available to Royal and concluded

that Royal lost under either. If Royal

meets the market price, it can operate at

capacity but it will lose money. If Royal

keeps its present prices, volume will drop,

and Royal will also lose money. Professor

Gray concluded that in order to survive

-25-

Q00069

Royal must end up with a labor cost that is

competitive with a non-union shop’s labor

cost.

Royal needs to buy new equipment at

a cost in excess of $600,000 in the next

few years. Since 1982, Royal has tightened

its belt in many ways. Non-union

aenagenent and executive salaries were cut

in 1982 and again in 1985. Trade

associations memberships were eliminated.

When Royal moved its plant in 1985 at the

expiration of its former lease, even the

doorknobs were taken and reused. Royal’s

new premises are smaller and the rent is

significantly less than that sought by its

former landlord for a renewal lease. Union

labor cost, Royal’s single largest expense,

is the only expense that has not been cut

in the last four years.*?

Li GAOL OAD PNM NEN SIN, 7 den treyadicion PRORPRLI ARS on <9

Code {1113(b)(1)(A) states that the

debtor should base its proposal on the most

complete and reliable information available

-26-

000070 -

at the time the proposal is- made.

Code {1113(b)(1)(B) states that the union

is to be provided with such relevant

information as is necessary to evaluate the

proposal. Royal is not a Fortune 500

. company. Although it has outside

| accountants, much of its financial work is

done by its own controller, Roberta Basel,

as can be expected. Royal commissioned no

outside studies by financial consultants

before requesting relief from the Union.

It had no fancy graphs or trend lines.

When Mr. Haberman first met with Mr. Powers

in January 1986, Mr. Haberman had but a

single sheet of paper on which were listed

Pe ee oe se ee)

some of the Union costs for 1985, being as

follows:

"Annuity (13%) $ 272,485

Welfare Fund (8.9765) 183,326

| Benefit & Productivity

i Fund (15.186%) 278,364

. Pension Fund (5.9851%) 122,196

five extra men (caused

by "priority" rules),

daily hiring charges,

training 300,000

TOTAL $1,156,217

a he a a

-27<

VOO07L

"Still to come: the impact of four

week vacation, double overtime, 6-

1/4 hour shifts, extra-ordinary

work rules... Clearly we are

talking about more than

$1,500,000."

Across the bottom of this typewritten page,

the audited sales and loss figures for 1984

and 1985 had been handwritten. This was

reliable and relevant information = and

complete enough to form a basis’ for

reasoned consideration of Royal’s proposal.

Thereafter, Royal provided supplemental

information and permitted the Union’s

accountant full access to its books and

records. The accountant choose to make

only two short visits to Royal’s premises.

By letter dated April 18, 1986, the

Union sent Royal an information request of

nine detailed items purportedly required to

evaluate Royal’s proposal. Some of the

items sought information about the basis of

olde anal Bak: Saye Sk Rane ile at") VNR RUS aire ae eee

Royal’s projections of future operations.

: Others sought itemization of Royal’s

-28-

V00072

estimates of the cost savings which would

be derived from each of its proposals.

None of this information had been

previously requested of the Debtor by the

Union’s accountant. At trial, the

accountant testified that he had not

advised the Union char it should request

the information sought in the April 18

letter. 22

The Union had no difficulty in

connection with the hearing on the Debtor’s

request for interim relief on March 21,

1986 in evaluating the dollar effect of the

request relative to the four benefit funds.

A Union must be assumed to understand the

economics of its own contract relative to

its members as that is fundamental to the

union’s role as bargaining agent for the

members. The failure of the Union to

request the information during the three

months following Royal’s request for relief

reflects that the information was not

-29-

V00073

fundamental to its ability to evaluate

Royal’s proposal. atom

The Union’s belated request was

simply part of its tactics relative to the

23 In the real world, the

rejection motion.

basic economics of Royal’s situation and

proposal could be calculated on the back of

the proverbial envelope. This case called

for an overview type of economic analysis.

For example, in light of the testimony that

the Debtor’s prices are 15-20% higher than

its non-union competitors, one could

approach the question of determining the

extent to which costs must be reduced by

considering the effect of a 15% price

reduction. On sales of $4,750,000 that

would be $712,500. The amount of

subsidiary information and refinements

which could be provided or made is endless.

Fine-tuning of the Debtor’s projections can

only occur through discussion, particularly

that which accompanies the bargaining

-30-

—

000074

process. Indeed, the Union appears to have

recognized this Debtor’s need for relief as

long ago as 1984 because at that time it

unsuccessfully sought certain modifications

in the Union contract from The Printers’

League on Royal’s behalf.

At trial the Union representative

pointed to the Debtor’s differing responses

at various times to how much it expected

its losses to be. Projections are

2 ley

necess approximations and will differ

depending on the different

| made. Here, the Debtor’s projections

developed and changed over a period of time

_ based on refinements and new information.

For example, only during the week of

April 28 did Royal learn that it would

lose a customer accounting for $400,000 of

sales in i985. The Debtor’s projections

did not include any provisions for funding

either a plan of reorganization or the

-31-

V0G075

purchase of new equipment required to keep

pace with technological changes.

At trial the Union through its

accountant attempted to show that the

Debtor’s projections were much too gloomy

yo ci7avgnsigmecn desi Gebinieideieinamiien ieieiaihee aki an Ra Naa, OE

by means of taking the Debtor’s historical

cost ratios for the last three years and

applying them to the Debtor’s projected

sales. This mechanical manipulation

resulted in projected losses for 1987 of

$34,204, 1988 of $79,600 and 1989 of

$120,108 as compared to the Debtor’s

projected losses of $1,409,850 in each of

1987 and 1988 and $1,794,600 ‘an 1989.

At Trial, Ms. Basel offered cogent

PASAT RIO FM IPE eh 0 PDI ns FN hae ca Jia ER ies ai aed

explanations of why

projections differ from the historical cost

ratio analysis offered by the Union

accountant. Ms. Basel discussed her

projections at length. Of great importance

to her projection is the labor to sales

ratio. In 1984 that ratio ranged from

ML ASNT REEL LA 2 WO TR RI a dah Hn, I OS

00007:

51.2% in the first quarter, historically

Royal’s best quarter, to 55.81% in the

fourth quarter. In 1985, the ratios ranged

from a first quarter 48.58% to a fourth

quarter 58.75%. Ms. Basel predicts that

the labor to sales ratio will rise to 59%

in 1986 and up to 78% in 1989. Reduction

in the labor to sales ratio would reduce

the profitted losses.

Ms. Basel’s projections are based on

current prices and 10% sales decrease per

annun. Although no projections were

offered based on Professor Gray’s

alternative strategy of reduced prices, it

is evident that in such projections labor

costs would also have to be reduced by

increases in productivity ox decreases in

price or a combination of these.

The savings sought by the Debtor

under the Union contract aggregate $868,023

for the balance of 1986, $1,175,754 for

1987, $1,150,879 for 1988 and $8946.122 for

-33-

; 000077

the first nine months of 1989. Comparison

of the proposed savings with projected

losses reflects that the savings are less

than the losses. The order of magnitude of

the Debtor’s request to the Union was

appropriate.

The Union’s analysis of the Debtor’s

financial position at trial remained that

set forth in a letter dated May 20, 1985 to

the BAP Fund from Herman Volk and Co.,

accountants for the Fund. That letter, *4

which was seen by the Debtor for the first

time during the trial, concluded that the

Debtor was not experiencing recurring

operating losses and was operating on a

profitable basis. The accountant reached

this conclusion by excluding payment to

former shareholders from operating

expenses. Similar payments were made to

former shareholders in 1985. In addition,

moving expenses were incurred in 1985. The

moving expenses are likewise not recurring

-34-

000078

operating expenses, but they still must be

reckoned with as a legitimate and necessary

corporate expense. The Union did not

discuss the details of its economic

analysis with the Debtor during’ the

prehearing negotiations.

Mr. Haberman, when taxed with

questions for the first time at trial about

the propriety of the payments to the former

shareholders, stated that in his judgment

that the payments were legitimate corporate

expenses. A number of the payment

: arrangements were made in lieu of the terms

: of existing contracts by which Royal was

| bound. He further stated that deferments

of various payments to former shareholders

13 had been obtained in 1983 and at other

times. As to the payments to Mr. Jack

Gabow, Mr. Haberman stated that they were

for a non-competition agreement pursuant to

which Mr. Gabow left his sales with Royal

and that it was important to Royal to have

-35-

} 000080

the sales. Mr. Haberman was of the view

that it was inappropriate for him to

request any further concessions from these

un oa nee

) individuals.

| This court does not find the

Debtor’s views on the shareholder payment

issue unreasonable. ?> In any event, the

former shareholder payments are irrelevant

to Royal’s projections since no payments to

| the former shareholders were included in

| the expense items. The Debtor has not

proposed a plan of reorganization yet and

what its ultimate treatment for these

persons might be is speculative. In light

of the subordinated nature of much of these

obligations and of the insufficiency of

tangible assets discussed above, these

persons’ prospects for a 100% distribution

under a plan seem far from certain. In all

events, a 100% distribution would appear to

be possible only in the form of a long-term

pay-out.

V00081

The second major point about the

equities of sacrifice made by the Union for

the first time at trial is the level of

executive compensation. Mr. Haberman’s

salary is $200,000 per year. Edwin Horn,

the other shareholder and executive, has an

annual salary of $235,000. In addition,

Mr. Horn is reimbursed entertainment and

other expenses of in excess of $50,000 per

year. In 1982, Messrs. Horn and Haberman

each received $300,000. In 1983, each of

them took a 50% pay cut, or $150,000 as

part of a package of expense reductions

totalling $825,420. At that time, a Mr.

Minson was still a shareholder and

executive of Royal and also received

$150,000 per year. Mr. Minson was forced

to retire during late 1984. The aggregate

received by Messrs. Horn, Haberman and

Minson in 1984 was $435,000. Upon Mr.

Minson’s retirement, Messrs. Horn and

Haberman increased their compensation to

-37=

V00082

$235,000 and $200,000 respectively, thus

partially restoring the 1983 reductions.

Mr. Horn is Royal’s chief salesman.

He is responsible for the production of the

bulk of Royal’s sales, which are to the

nation’s leading advertising agencies.

Royal has three other salaried

salespersons, whose salaries range from

$65,000 to over $100,000. In the past

Royal has had commissioned salesmen. These

persons left to join non-unionized

typography shops whose growth potential and

competitive position was better due to

lower product prices, and who therefore

offered greater commission potential. Mr.

Horn’s contacts in the advertising industry

and proven sales record indicate that it is

reasonable to believe he could secure other

employment and receive a commission of 10-

15%. That would amount to over $400,000

per annum, an amount’ significantly in

excess of his present salary. Although

-38-

000083

high, Mr. Horn’s expenses are necessary for

the production of business. Mr. Horn’s

personal social life revolves around his

business clients. It appears to the court

that it is Mr. Horn’s personal and life-

long contacts with persons in the largest

advertising agencies in the United States

which has allowed Royal to continue over

the last few years against the odds.

Indeed, Mr. Haberman expressed the view

that he wished Mr. Horn would even spend