Appendix — Morgan Guaranty Trust Co. v. Rinier

wproine Court, U. Me ,

FILED

MAR 1& 49989

SUPREME COURT OF THE UNITED STATES

OctoBeR TERM, 1979

No.

Cuak.es G. RopMan, as Trustee of the Estate of W. T. Grant

Company, Bankrupt, and

Morcan Guaranty Trust Company or New York,

Petitioners,

v.

Auton Rinier, as Agent for Certain Employees of

Bankrupt; ANswerinc EmpLoyess or BANKRUPT; Loca 807-

IBT; Reram Cierks INTERNATIONAL ASSOCIATION; and

NationaL Larox Rextations Boarp,

Respondents.

Jornt ApPpeNpIXx To PETITIONS ror A Writ oF CERTIORARI TO

THE Unitep States Court or APPEALS FOR THE SECOND

CrirculIr

Harvey R. Mixer,

Attorney for Petitioner Charles G.

Rodman, as Trustee of the Estate

, of W. T. Grant Company, Bankrupt

Ricwarp P. Krasnow 767 Fifth Avenue

Diane K. WrrEks New York, New York 10022

Of Counsel (212) 758-7800

Puiu C. Porrer, JR.

Attorney for Petitioner

Morgan Guaranty Trust Company

of New York

1 Chase Manhattan Plaza

OapEen NortHrop Lewis New York, New York 10005

Of Counsel (212) 530-4000

JOINT APPENDIX

TABLE OF CONTENTS

Appendix I: Opinion and Judgment of the Court of

PRE os ata ais aw dcukdianeness

Appendix II: Decision and Order of the District

5 ke a PaCS OBIE AEM alt ARON

Appendix III: Decision and Order of the Bank-

a, ee

Appendix IV: Jn re Hotel Circle, Inc., Decision of

the Ninth Circuit, Jan. 21, 1980 __

PAGE

9a

23a

33a

Note: The appendix material contained in this Joint Appendix is

filed on behalf of both petitioner Charles G. Rodman, as Trustee of

the Estate of W. T. Grant Company, Bankrupt, and petitioner Morgan

Guaranty Trust Company.

3a

APPENDIX I

4a

UNITED STATES COURT OF APPEALS

FOR THE

Seconp Circuit

At a stated Term of the United States Court of Appeals

for the Second Circuit, held at the United States Court-

house in the City of Bridgeport, on the 3rd day of January,

one thousand nine hundred and eighty.

Present:

Hon. Wituiam H. Timspers UNITED STATES

COURT OF

—-

1

Hon. THomas J } MEsKILL Jan 03 1980

Circuit Judges A. Daniel Fusaro,

Hon. Luoyp F. MacManon Clerk

: ee SEconD Circuit

Umted States District Judge

Sitting by Designation

In re W. T. Grant Company, Bankrupt.)

Cuares G. Ropman, as Trustee of the

Kstate of W. T. Grant Company,

Bankrupt, and Morcan Guaranty

Trust Company or New York,

Petitioners-Appellants,

Docket Nos.

” | 79-5046

Auton Rintrr, as Agent for Certain Em- and 79-5047

ployees of Bankrupt, ANswertne Eim-

PLOYEES OF Banxkrupt, Loca 807-IBT,

Retaru CuierKks INTERNATIONAL Asso-

ciaTION, NationaL Lazsor Re.ations

Boagp,

Respondents-Appellees. |

Appeal from the United States District Court for the

Southern District of New York.

5a

This cause came on to be heard on the transcript of

record from the United States District Court for the South-

ern District of New York, and was argued by counsel.

On ConsipERATION WHEREOR, it is now hereby ordered,

adjudged, and decreed that the order of said District Court

be and it hereby is affirmed substantially for the reasons

set forth in District Judge Duffy’s opinion of July 18, 1979

and Bankruptcy Judge Galgay’s opinion of June 22, 1978,

supplemented by the following statement of ours.

This appeal arises from the severance pay claims of

over 32,000 former employees of W. T. Grant Co., which,

having filed a Chapter X1 petition for an arrangement on

October 2, 1975, was adjudicated a bankrupt on April 13,

1976. We find the dispositive questions on appeal to be

(1) whether Grant, as debtor-in-possession, rejected the

executory contracts of its employees, and (2) whether the

severance pay claims arising from those contracts are en-

titled to first priority as costs and expenses of adminis-

tration.

We answer the first question in the negative. Under

‘the decisions in this Circuit...an executory contract is

binding on the debtor in possession if it receives benefits

under it.’’ In re-Unishops, Inc., 553 F.2d 305, 309 (2 Cir.

1977) (Medina, J.). Here, Grant received benefits under

the contracts by permitting the workers to continue in its

employ after it entered Chapter XI. As the district court

stated, Grant secured ‘‘the services of an experienced

Grant personnel during the Chapter XI proceeding. Ap-

parently, had Grant been forced to terminate all its em-

ployees upon entering Chapter XI and therefore recruit a

new work force, even its short-lived Chapter XI attempt

would have been virtually impossible.’’

The Trustee argues that Grant rejected the executory

contracts by posting notices in its stores that it was dis-

continuing the severance pay benefits. We agree with the

6a

bankruptcy and district courts, however, that only a formal

rejection pursuant to § 313(1) of the Bankruptcy Act, 11

U.S.C. § 713(1) (1976), is sufficient to disaffirm an execu-

tory contract. See In re Unishops, Inc., supra, 553 F.2d

at 308.

Turning to the second question before us, we reaffirm

and adhere to our decision in Straus-Duparquet, Inc. v.

Local Union No. 3 International Brotherhood of Electrical

Workers, 386 F.2d 649 (2 Cir. 1967), and hold that the en-

tire portion of the employees’ severance pay claims is

entitled to first priority as costs and expenses of admini-

stration.

The Trustee argues that severance claims should be

given a priority only to the extent benefits were conferred

upon Grant during the aborted Chapter XI proceeding. He

further argues that severance pay, like wages, is earned

from day to day, and that the amount of severance pay

increases as the employee’s tenure increases. The Trustee

therefore asserts that the only portion of the severance pay

claim that conferred a benefit upon Grant during the Chap-

ter XI proceeding is that which accrued subsequent to the

filing of the Chapter XI petition. Only this portion of the

severance claim, the Trustee urges, is entitled to priority.

As the courts below recognized, Straus-Duparquet fore-

closes this argument. There we held that severance pay

is not earned from day to day and unlike wages does not

accrue. Appellants attempt to distinguish Straus-Dupar-

quet on the ground that there the Chapter XI proceeding

was successful and that only a small portion of the work

force was released. Nowhere in Straus-Duparquet did we

expressly or inferentially predicate our holding on those

facts. Instead, our decision turned on our definition of

severance pay as compensation for termination, as opposed

to a form of wages that accrues from day to day.

Finally, in the alternative, appellants urge that, if

Straus-Duparquet is fatal to their claim, we should over-

7a

rule that decision since other courts have declined to fol-

low it. In re Mammoth Mart, Inc., 5386 F.2d 950 (1 Cir.

1976); In re Diamond Reo Trucks, Inc., No. 74-1788 B 5

(W.D. Mich. June 19, 1979). Our Court, however, repeat-

edly has followed Straus-Duparquet. See, e.g., In re Uni-

shops, Inc., supra; In re Bohack Corp., 535 F.2d 1240 (2

Cir. 1975), (memorandum order), cert. denied, 425 U.S. 966

(1976). In our opinion the rationale of Straus-Duparquet—

that severance pay is compensation—is sound. We decline

appellants’ invitation to overrule Straus-Duparquet, which

remains the law of this Cireuit.

Affirmed.

/s/ Wrii11am H. Timpers

William H. Timbers

/s/ Tuomas J. Meskinu

Thomas J. Meskill

Circuit Judges

/s/ Luoyp F. MacManon

Lloyd F. MacMahon

United States District Judge

Sitting by Designation

8a

APPENDIX II

9a

UNITED STATES DISTRICT COURT

SoutHern District or New York

In re UNITED STATES

W. T. Grant Company, DISTRICT COURT

Bankrupt hee

pl. Jul 18 1979

12:44 p.m.

CuarLes G. Ropman, as Trustee of the setae tee

Estate of W. T. Grant Company,

Bankrupt, and Morcan Guaranty

Trust Company or New York,

: Appellants, ‘Bankruptcy No.

‘-against— 75 B 1735

Auton Rrnter, as agent for certain em- (KTD)

ployees of Bankrupt, Answerine Em- OPINION

PLOYEES OF Bankrupt, Loca 807-IBT,

Reta. Crerks IntTeRNaTIoNAL Asso-

craTION, National LaBor ReE.ations

Boarp,

Appellees.

APPEARANCES :

Wet, GotsHaL & Mances

Attorneys for Charles G. Rodman,

as Trustee of the Estate of

W. T. Grant Company, Bankrupt

Of Counsel: Harvey R. Miller, Esq.

Richard P. Krasnow, Esq.

Davis Pork & WaRDWELL

Attorneys for Morgan Guaranty

Trust Company of New York

Of Counsel: Philip C. Potter, Jr., Esq.

Ogden N. Lewis, Esq.

LC rt—“—i—s—‘“‘“‘“‘i‘(‘(

10a

TasHuik & SaLoMoNn

Attorneys for Alton L. Rimier as Common Agent for cer-

tain employees of Bankrupt

~ Of Counsel: Chester B. Salomon, Esq.

Natanson Reicu & Barrison

Attorneys for Answering Employees

Of Counsel: George Natanson, Esq.

Earl Barrison, Esq.

Vuaveck, Exias, Vuapeck, Zimny & Enceiuarp, P.C.

Attorneys for RCIA

Of Counsel: Sheldon Engelhard, Esq.

WittuMm WacHTER

Deputy Assistant General Counsel

Attorneys for National Labor Relations Board

Of Counsel: Michael D. Stein, Esq.

Kathy L. Krieger, Esq.

Kevin Tuomas Durry, D.J.:

This is an appeal from an order of the Honorable John

J. Galgay, Bankruptcy Judge, entered June 22, 1978, con-

cerning the treatment and disposition of certain claims

filed against the bankrupt estate of the W. T. Grant Com-

pany [hereinafter referred to as ‘‘Grant’’]. In particular,

the order addresses the claims of former Grant employees

who qualified for severance benefits and who continued to

work for Grant during its unsuccessful attempt at an

arrangement under~Chapter XI of the Bankruptey Act

{hereinafter sometimes referred to as the ‘‘Act’’]. Judge

Galgay directed that these claims be treated as a cost and

expense of the unsuccessful Chapter XI proceeding and

pursuant to Section 64(a)(1) of the Act, entitled to full

payment as a first priority. The appellants, Charles G.

Rodman as Trustee of Grant’s estate [hereinafter referred

lla

to as the ‘‘Trustee’’], and Morgan Guaranty Trust Com-

pany of New York on behalf of itself and as agent for other

bank claimants, object to this priority treatment and have

filed the instant appeal.

On October 2, 1975, Grant filed a petition for an arrange-

ment under Chapter XI of the Act. Thereafter, by order

of the Bankruptcy Court dated April 13, 1976, Grant was

adjudicated a bankrupt.

Prior to the Chapter XI proceeding, Grant was the

operator and manager of over 1,000 retail outlets. In order

to induce individuals to accept employment with Grant, it

offered potential employees a wage and compensation pack-

age which included the receipt of severance pay benefits.

The severance pay benefit plans for Grant employees are

set forth in the Grant Store Manual, New York Office

Supervisor’s Personnel Manual, District Manager’s Guide

to Termination Policy and Procedure and approximately

93 Collective Bargaining Agreements between Grant and

various union representatives. See Trustee’s Exhibits 1A,

3, 7 and 12A; Retail Clerks International Association’s

[hereinafter referred to as *“RCIA’’] Exhibit A. Despite

minor variations the agreements generally provide that a

worker who meets a minimum ‘‘length of service”? require-

ment (generally one year), is, upon termination, entitled

to a severance payment. The precise amount of the pay-

ment is determined by the number of years the worker was

employed by Grant and his weekly salary at the date of

termination. For example, under the typical plan a worker

employed for two years would receive one week’s pay

whereas an employee with five“years of service would

receive two weeks’ pay.

Upon the filing of its petition on October 2, 1975, Grant,

pursuant to Section 342 of the Act, became a debtor-in-

possession and was expressly authorized to operate and

manage its retail outlets. Thereafter, during the unsuccess-

ful Chapter XI proceeding, many of Grant’s retail outlets

12a

were liquidated and its employees terminated. Finally, in

April 1976, Grant was adjudicated a bankrupt and its re-

maining retail outlets were liquidated and the balance of

its work force terminated. As a result, approximately

32,000 employees who were employed during the aborted

Chapter XI proceeding and were eventually terminated

have filed claims for severance pay benefits. It has been

estimated that these claims when finally computed will be

in excess of 11 million dollars.

Section 64 of the Bankruptcy Act dictates that certain

debts of a bankrupt shall have priority over other debts.

It provides:

The debts to have priority, in advance of the pay-

ment of dividends to creditors, and to be paid in full

out of bankrupt estates, and the order of payment

shall be (1) the costs and expenses of administration

... (2) wages and commissions, not to exceed $600 to

each claimant, which have been earned within three

months before the date of the commencement of the

proceeding. ...

The Trustee, in his application for instructions as to the

treatment and disposition of claims filed against the bank-

rupt estate, characterized the claims for severance pay as

part of the wages earned by Grant employees.! He recom-

mended, therefore, that each severance claim be divided into

three categories and paid accordingly. First, that portion

of an employee’s severance claim which accrued subsequent

to the filing of the Chapter XI petition would be fully paid

as an expense of administration under Section 64(a)(1) of

the Act. Second, that portion of an employee’s severance

claim which accrued during the three months prior to the

filing of the Chapter XI petition, not exceeding $600, would

be paid as a secondary priority claim under Section

64(a)(2). The balance of the claim would be treated as a

pre-Chapter XI non-priority unsecured wage claim.

13a

The claimants,” however, argue that severance pay bene-

fits are not akin to wages but rather are a form of compen-

sation for the termination of the employment relationship.

They urge that a claim for severance pay does not lend itself

to the type of tortured division the Trustee would subject it

to. They conclude, therefore, that those employees who

continued to work for Grant during the unsuccessful

Chapter XI proceeding are entitled to have their entire

severance claim treated as a cost and expense of admin-

istration.

Judge Galgay adopted the claimants’ reasoning. He

found that despite contrary authority in other Circuits,

under the clear pronouncements of the Second Circuit

severance pay is not earned from day to day and unlike

wages does not accrue. Accordingly he found that the

severance claims for those individuals who continued to

work for Grant during the Chapter XI proceeding were not

divisible as suggested by the Trustee and were fully payable

as a cost and expense of administration. In addition, J udge

Galgay found that although Grant, as debtor-in-possession,

had the power to: reject the severance provisions as execu-

tory contracts, it failed to formally do so and consequently

the severance provisions survived the Chapter XI pro-

ceeding.

There can be no doubt that in this Circuit severance pay

benefits guaranteed under a collective bargaining agree-

ment are not to be construed as wages. Indeed, in Straus-

Duparquet, Inc. v. Local Union No. 3 International Brother-

hood of Electrical Workers, 386 F.2d 649 (2d Cir. 1967) this

Circuit defined severance benefits as

a form of compensation for the termination of the

employment relation, for reasons other than the dis-

placed employees’ misconduct, primarily to alleviate

the consequent need for economic readjustment but also

to recompense him for certain losses attributable to the

dismissal.

l4a

Id. at 651. The Court went on to hold that ‘‘[s]everance

pay is not earned from day to day and does not ‘accrue’ so

that a proportionate part is payable under any circum-

stances.’’ Id. The Court concluded that since severance

pay is a form of compensation for termination of the

employer-employee relationship, where the termination is

an incident of the administration of a bankrupt’s estate,

the payments are entitled to a priority as an expense of

administration. Id. See also In re Unishops, Inc., 553 F.2d

305, 308 n.1 (2d Cir. 1977). Thus, insofar as those em-

ployees were entitled to severance pay benefits pursuant to

the several collective bargaining agreements involved

herein, their severance claims are not divisible as suggested

by the Trustee. Consequently, absent a rejection of these

executory agreements by the Trustee, these claims for

severance pay are entitled to a priority.

The law, however, is somewhat less clear with respect

to individual severance pay agreements. In the leading

case, Unishops, supra, 553 F.2d 305, the Court was pre-

sented «with a letter agreement between a corporation and

one of its executive officers concerning severance pay bene-

fits. After eleven years of service Unishops’ Chief Operat-

ing Officer was promised by the corporation that upon

termination he would be entitled to a $100,000 severance

payment. Just eight months after the agreement, in No-

vember 1973, Unishops filed a petition for an arrangement

under Chapter XI of the Bankruptcy Act. Thereafter,

Unishops continued to run its operation as a debtor-in-

possession. The individual continued to act as Chief

Operating Officer at Unishops until July 1974 when he was

discharged.

The Court found that since the officer had continued

in Unishops’ employ for some time after it entered Chapter

XI, and since the debtor-in-possession never rejected the

executory severance agreement, Unishops received benefits

under the contract and hence he was entitled to a priority

lda

under Section 64(a)(1) of the Act. The confusion arises,

however, in a footnote to the Court’s decision where it is

stated that while those ‘‘cases involving severance pay

under collective bargaining contracts, such as Straus-Du-

parquet, Inc. v. Local Union No. 3, supra, 386 F.2d 649 (2d

Cir. 1967), correctly define severance pay as compensation

for termination of employment and hence nsually an ex-

pense of administration, . .. they are not determinative of

the issue before us.’’ Id. at 308 n.1 (emphasis supplied).

The Trustee urges that the above quoted language indic-

cates that although severance benefits under a collective

bargaining agreement are to be construed as compensation

for termination, individual severance pay agreements are

not to be so classified. I disagree.

A reading of the Unishops’ decision indicates that the

issue before the Court was not the classification of severance

benefits as either wages or termination compensation, but

rather whether the debtor-in-possession ever rejected the

executory severance as authorized under the Bankruptcy

Act. Consequently, the Straus-Duparquet doctrine was

simply ‘‘not determinative’’ of the issue before the Uni-

shops’ Court. Nowhere did the Court indicate, as the

Trustee suggests, that the Straus-Duparquet doctrine was

somehow inapplicable. Moreover, there appears to be no

sound reason why the doctrine should not apply with equal

force to individual severance agreements. Indeed, the

nature of severance benefits is not altered simply because

entitlement to the benefits originates in an individual em-

ployment contract as opposed to a collective bargaining

agreement. Suffice it to say that in the case at bar the indi-

vidual severance agreements were in no sense intended to

represent compensation for services rendered or to be ren-

dered by Grant employees. In fact, individual agreements

were virtually identical to those contained in the collective

bargaining agreements and could only be intended as com-

pensation for termination. Accordingly, those severance

16a

claims arising out of individual employment agreements

must stand on the same ground as those emanating from

; i .

collective bargaining agreements.

This determination, however, does not end our inquiry.

It is clear that the Bankruptcy Act permits a debtor-in-

possession to reject executory contracts. See, eg., 11

U.S.C. §§ 313(1), 357(2) and Chapter XI rule 11-53, 415

U.S. 1036 (1974).4 See also in re Unishops, supra, 553

F.2d at 308. However, this Circuit has held that

[a] debtor in possession . . . may disaffirm or reject

an executory agreement only in accordance with the

statutory procedures. As stated in the leading treatise,

‘The failure to assume affirmatively an executory

contract does not result at any time in a rejection

of the contract. Whether the debtor is in posses-

sion, or whether there is a receiver or trustee, the

contract can be rejected only by affirmative action

under §313(1) and Chapter XI Rule 11-53 or

§ 357(2). Unless so rejected, the contract continues

im effect.’

Id. at 308 (emphasis added). Thus, the issue is whether

Grant ever rejected the executory severance agreements

while it acted as debtor-in-possession.

It is undisputed that Grant did not affirmatively reject

the agreements in issue pursuant to the statutory provi-

sions of the Bankruptcy Act. The Trustee argues, however,

that a debtor-in-possession is a separate and distinct juri-

dical entity from that of the pre-Chapter XI debtor and as

such is not bound by the agreements of the debtor absent an

affirmative assumption thereof. He concludes that since

Grant made no such affirmation of the severance agreements

during the Chapter XI proceeding, it is not bound by the

agreements. Alternatively, the Trustee argues that Grant Ss

conduct upon commencement of the Chapter XI proceeding

17a

was sufficient under the circumstances to reject the seve-

rance agreements. Finally, the Trustee urges that should

the severance claims be deemed as a cost and expense of

administration, the amount of each claim must be limited to

the actual value of the benefits conferred upon the debtor-in-

possession during the Chapter XI proceeding. I find these

arguments to be inapposite.

There is no doubt that a debtor-in-possession is deemed

to be an entity separate and distinct from the debtor. See,

e.g., Truck Drivers Local No. 807 v. Bohack Corp., 541 F.2d

312 (2d Cir. 1976); Brotherhood of Railway, etc. v. REA

Express, Inc., 528 F.2d 164 (2d Cir.), cert. denied, 423 U.S.

1017, 1073 (1975-76) ; Shopman’s Local No. 455 etc. v. Kevin

Steel Products, Inc., 519 F.2d 698 (2d Cir. 1975). It is

equally settled, however, that a claim arising under an

executory contract is entitled to a priority as a cost and ex-

pense of administration ‘‘if the trustee or debtor in posses-

sion elects to assume the contract or if he receives benefits

under it.’’ Unishops, supra, 553 F.2d at 308 (emphasis

added). Consequently, a formal assumption of the contract

is unnecessary where the debtor-in-possession reaps the

benefits of the contract during a Chapter XI proceeding.

In the instant action, Grant never formally assumed the

executory contracts in issue. However, it did permit its

employees, covered by the severance agreements, to con-

tinue in its employ after it entered Chapter XI. Hence, at

the very least Grant received benefits under the executory

contracts by virtue of securing the services of experienced

Grant personnel during the Chapter XI proceeding. Ap-

parently, had Grant been forced to terminate all its em-

ployees upon entering Chapter XI and thereafter recruit

a new work force, even its short-lived Chapter XI attempt

would have been virtually impossible. Accordingly, in

light of these benefits the severance claims of the employees

were entitled to a priority as a cost and expense of ad-

ministration. Unishops, supra, 553 F.2d 308. This is true

18a

despite Grant’s ‘‘good faith attempt to reject the executory

contracts formally binding upon the debtor.’’ See Judge

Galgay’s memorandum opinion at page 5. As Judge Galgay

correctly held, only a formal and affirmative rejection pur-

suant to Sections 313(1), 357(2) of the Bankruptcy Act was

sufficient to disaffirm the contracts herein. Jd. Suffice it to

say that Grant’s efforts, short of a formal rejection, were

insufficient to cause a rejection of the severance agreements

herein.°

I turn finally to consider whether the Grant employees

are entitled to recover 100 percent of their severance awards

as a cost and expense of administration. The Trustee

argues that since these claims were given priority treat-

ment solely because Grant received benefits under the

severance agreements during the Chapter XI proceeding,

Judge Galgay erred in permitting 100 percent of each claim

to be given a priority. Relying upon American Anthracite &

Bituminous Coal Corp. v. Leonardo Arrivabene, S.A., 280

F.2d 119 (2d Cir. 1960), the Trustee urges that a severance

claim should be given a priority only to the extent benefits

were conferred upon Grant during the aborted Chapter XI

proceeding. In other words, rather than treating the entire

severance claim as computed under the agreement as a cost

and expense of administration, only the ‘‘reasonable value’’

of the benefits conferred upon Grant should be granted

priority status.

While apparently supporting the Trustee’s position, I

believe the Second Circuit has recently retreated from that

portion of its decision in American Anthracite which limits

the priority to the reasonable value of the benefits conferred.

Indeed, in Unishops, supra, the Court held that an employ-

ee’s severance claim was entitled to be treated, without

limitation, as a cost and expense of administration solely

because the debtor-in-possession had received the benefits

of the employee’s services during the Chapter XI proceed-

ing. The Court, while citing American Anthracite, made no

19a

attempt to limit the claim to the value of the benefits con-

ferred. Rather, the Court permitted the claimant to re-

cover the full amount of severance pay guaranteed under

the severance agreement as a cost and «pense of adminis-

tration. Unishops, supra, 553 F.2d at 308. I feel con-

strained by this later decision and accordingly affirm Judge

Galgay’s treatment of the severance claims.®

Accordingly, Judge Galgay’s order is affirmed.

So ORpDERED.

/8/ Kevin THomas Durry

U. 8. D. J.

Datep: New York, New York

July 18, 1979

20a

FOOTNOTES

1]t is important to note from the outset that at no time did an

employee’s right to severance pay vest prior to termination. Under

the express terms of the several severance plans at bar, employees who

voluntarily resigned or were terminated for cause were not entitled to

severance payments. Consequently, the entitlement to severance pay

was not finally determined until the day of termination.

2 The claimants, appellees herein, consist of Alton L. Rinier, as

common agent on behalf of former Grant employees, Answering Em-

ployees of the Bankrupt, Local 807-IBT, Retail Clerks International

Association and the National Labor Relations Board. The sole dis-

tinction among these claimants is that while some are governed by the

severance provisions contained in the over 53 Collective Bargaining

Agreements between Grant and Union representatives (Trustee’s

Exhibit 7; RCIA’s Exhibit A), the remaining non-union employees

are governed by the severance provisions contained in the various

Grant Store Manuals (Trustee’s Exhibits 1A, 3 and 12A).

3 The Trustee also seeks to avoid the Straus-Duparquet doctrine

by arguing that it should be limited only to those cases in which a

Chapter XI arrangement has been successful. I find this attempted

limitation to be totally artificial and without merit.

4 Section 713 of the Act provides :

Upon the filing of a petition, the court may, in addition to the

jurisdiction, powers, and duties conferred and imposed upon it

by this chapter—

(1) permit the rejection of executory contracts of the debtor,

upon notice to the parties to such contracts and to such other

parties in interest as the court may designate ;

Section 757 of the Act goes on to provide:

An arrangement within the meaning of this chapter may include—

(1) provisions for treatment of unsecured debts on a parity

one with the other, or for the division of such debts into

classes and the treatment thereof in different ways or upon

different terms ;

* * *

5See also In re Alfar Dairy, Inc., 458 F.2d 1258 (Sth Cir.), cert.

denied, 409 U.S. 1048 (1972). In Alfar the Court held that the

Bankruptcy Act does not permit a “tacit” rejection of an executory

contract. Jd. at 1260. Consequently, “even though a party to an

executory contract . . . may know by one means or another that the

2la

bankrupt does not intend to perform, the contract is not voided as a

result of this knowledge but remains in force until rejected pursuant

to the Act.” Jd. at 1261.

© This result fully comports with this Circuit’s decision in Straus-

Duparquet holding that since severance pay is a form of compensation

for termination of the employment relation rather than something that

is earned from day to day, it is not capable of apportionment and the

full severance award is payable upon termination. 386 F.2d at 651.

22a

APPENDIX III

23a

UNITED STATES DISTRICT COURT

SouTHERN District or New York

In the Matter

— of — No. 75 B 1735

W. T. Grant Company

MEMORANDUM

Bankrupt.

OPINION

Joun J, Gatcay—Bankruptcy Judge

The trustee for the bankrupt estate of W.T. Grant

Company has applied to this Court for instructions as to

the treatment and disposition of claims filed against the

bankrupt estate by former employees of Grant for sever-

ance pay benefits. The claims arose as a result of the peti-

tion filed by W.T. Grant Company on October 2, 1975 for an

arrangement under Chapter XI, Sec. 322 of the Bankruptcy

Act, 11 U.S.C. See. 722. Despite attempts to rehabilitate

the operations and management of the retail chain, the

company was adjudged a bankrupt by this court on April

13, 1976, compelling the liquidation of all retail outfits as

well as the termination of employment of approximately

75,000 individuals.

Prior to the filing of the Chapter XI petition, Grant

provided employees with a wage and compensation package

which included the prospect of receiving severance pay

benefits in the event of dismissal, dependent upon length of

service with the company. As an employee’s term of em-

ployment increased, the amount of his potential severance

pay benefits for dismissal also increased. Subsequent to

the filing of the Chapter XI petition, Grant as debtor-in-

possession, notified its employees that severance pay bene-

fits would be discontinued pending the development of a

payment plan subject to the approval of this court. A total

of 41,000 proofs of claim seeking severance pay benefits in

24a

excess of $20,000,000 were eventually filed by employees

against the bankrupt estate.

The issue raised in this proceeding questions whether

severance pay benefits owed by the debtor-in-possession to

employees who performed services for the bankrupt prior

to the filing of the petition are to be treated as costs and

expenses of administration which are entitled to full pay-

ment in an unlimited amount under Sec. 64(a)(1) of the

Bankruptcy Act, 11 U.S.C. 104(a) (1).

The trustee characterizes the claims for severance pay

benefits as part of the wages earned by each eligible

employee during the course of his employment, with the

right to and the amount of such benefits dependent upon

the period of employment. Consequently, the trustee

recommends that the claims be awarded on a pro-rata basis

through the use of a per diem value established for the year

preceding the termination of the particular employee.

Accordingly, the portion of severance pay which has

accrued subsequent to the filing of the Chapter XI petition

would be paid as an expense of administration under Sec.

64(a)(1) of the Bankruptey Act. The portion which had

accrued in the three months prior to the filing of the Chap-

ter XI petition not in excess of $600, would be paid as a

second priority claim under Sec. 64(a)(2). The balance of

the claim would be treated as a pre-Chapter XI non-priority

unsecured wage claim. The trustee argues that the pro-

posal fully conforms with the provisions of the Bankruptcy

Act, provides fair and equitable treatment of all former

employees and protects the interests of the other creditors

of the bankrupt estate.

The case law governing the matter in question is beset

by a sharp conflict between the circuits. Two circuits have

held that only that portion of the severance pay claim which

can be allocated to services performed by employees after

the filing of the arrangement is entitled to first priority, In

25a

re Mammoth Mart, Inc. 536 F.2d 950 (1st Cir. 1976) ; In re

Public Ledger 161 F.2d 762 (3d Cir. 1947), whereas our cir-

cuit (the 2nd Circuit) has held that the entire amount of

such a claim should be afforded Sec. 64(a)(1) treatment,

In re Straus-Duparquet, Inc. 386 F.2d 649 (2d Cir. 1967).

The trustee urges this court to embrace the law in the First

and Third Circuits as an alternative to the position adopted

by the Second Circuit in In re Straus-Duparquet, supra and

its progeny.

The trustee argues that severance pay benefits owed

by the debtor-in-possession to employees who performed

services for the bankrupt prior to the commencement of the

Chapter XI are not costs and expenses of administration

entitled to full payment in an unlimited amount. This

position is premised upon the fact that W.T. Grant Com-

pany, as debtor-in-possession under Chapter XI, became a

new entity ‘‘with its own rights and duties, subject to the

supervision of the Bankruptey Court.’? Shopmen’s Local

Union No. 455 v. Kevin Steel Products, Inc. 519 F.2d 698

(2d Cir. 1975); Brotherhood of Railway Express v. REA

Express, Inc. 523 F.2d 164 (2d Cir. 1975), cert. denied 423

US 1017 (1976). See also Allegaert v. Perot 548 F.2d 432

(2d Cir. 1977). Thus, we must consider the legal rights of

two separate and distinct juridical entities: the pre-petition

debtor and the post-petition debtor-in-possession.

The fundamental role of the debtor-in-possession is re-

habilitation of the financially troubled business. In fur-

therance of that goal, the debtor-in-possession is free to

terminate unprofitable activities and reject burdensome

executory contracts, see 11 U.S.C. See. 731(1). The Second

Circuit has previously recognized that ‘‘(t)he claims of a

creditor having an executory contract with the debtor at

the time the debtor’s petition is filed is entitled to priority

under these provisions only if the trustee or debtor-in-pos-

session elects to assume the contract or if he receives bene-

fits under it.’’ American Anthracite & Bituminous Coal

26a

Corp. v. Leonardo Arrivabene S.A., et al, 280 F.2d 119 (2d

Cir. 1960).

The trustee asserts that the executory wage contracts

between the employees and the Grant Company were not

adopted or assumed by the debtor-in-possession. The store

closing manual prepared by the debtor-in-possession spe-

cifically stated in reference to termination pay that the

company was developing a plan for the payment of termi-

nation or incentive pay in connection with store closings,

which would be subject to the approval of the Bankruptcy

Court. Furthermore, the debtor-in-possession distributed

a notice posted in all stores which informed all employees

of the policy to discontinue the payment of severance pay,

pending an order of the Bankruptcy Court.

The evidence introduced by the debtor-in-possession

clearly indicates a good faith attempt to reject the execu-

tory contracts formerly binding upon the debtor. How-

ever, the fact remains that the debtor-in-possession never

did follow the formal rejection proceedings outlined in the

Bankruptcy Act. This hybrid action can be contrasted

with the steps taken by the debtor-in-possession in the REA

bankruptcy to affirmatively reject the collective bargaining

agreements binding upon the debtor.

The trustee rests his proposal for allocating severance

pay upon the fact that the debtor-in-possession received

benefits under the contract during the Chapter XI pro-

ceeding. The trustee asserts that the claims for severance

pay benefits may be entitled to priority as costs and ex-

penses of administration to the extent that the considera-

tion supporting the claims was supplied during the reorga-

nization: See In re Mammoth Mart, Inc., supra. The First

Circuit found in Mammoth Mart that the services per-

formed for the debtor over the entire period of each

claimant’s employment constituted the consideration for the

claims made. Since no part of the claims arose from serv-

27a

ices performed for Mammoth Mart as debtor-in-possession,

no portion of the claims secured Sec. 64(a) (1) priority.

Similarly, in the case at hand, the amount of severance

pay claims depends upon the length of employment and

all of the services performed for W. T. Grant Company

constitute consideration for the severance pay claims made.

Consequently, the trustee proposes to allocate, as a first

priority, the reasonable value of the benefits conferred upon

the debtor-in-possession by each claimant.

The trustee asserts finally, that his proposal best satis-

fies the equitable principles governing the Bankruptcy

Act. The Supreme Court stated that ‘‘(i)f one claimant

is to be preferred over others, the purpose should be clear

from the statute’. Nathanson v. NLRB 344 U.S. 25, 29

(1952). The Trustee has questioned the statutory basis for

affording the entire amount of a severance pay claim firs

priority treatment in light of the careful consideration

Congress gave to the allocation of employee claims under

Sec. 64(a)(2). The Trustee argues that his proposal best

maintains the desired cénsistency between Sec. 64(a) (1)

and 64(a)(2) of the Bankruptcy Act.

The former employees of Grant vigorously object to the

trustee’s proposal. The employees assert that payment of

severance pay was fixed by rules and regulations of the

Company which remained in force after the filing of the

petition and are binding upon the debtor-in-possession.

The applicable law recognizes severance pay as damages

payable for termination of employment. Since termination

occurred during a Chapter XI proceeding, the full amount

of severance pay is owed by the debtor-in-possession as an

expense of administration. The employees rely upon the

controlling principles in In re Straus-Duparquet, Inc. 386

F.2d 649 (2d Cir. 1967) and its progeny, In re Bohack 535

F.2d 1240 (2d Cir. 1975) and In re Unishops, Inc., 553 F.2d

305 (2d Cir. 1977).

28a

The Court held in Straus-Duparquet, that ‘‘(s)everance

pay is not earned from day to day and does not accrue so

that a proportionate part is payable under any circum-

stances. After the period of eligibility is served, the full

severance pay is due whenever termination of employment

oceurs.’’ 386 F.2d 651. The former employees closely link

the facts at hand to those in Straus-Duparquet and argue

that since employment was terminated as an incident of the

administration of the bankrupt’s estate, severance pay is an

expense of administration and is entitled to priority treat-

ment.

Although this Court finds the logic of the First Circuit

in Mammoth Mart, supra, appealing and the holding most

consistent with the equitable principles in the Bankruptcy

Act, we are bound by the controlling authority in the Second

Cireuit and therefore must apply the rationale of Straus-

Duparquet, supra, to the matter in question. Circuit Judge

Friendly aptly phrased this principle in his concurring

opinion in United States v. A Motion Picture Entitled ‘I

am Curious Yellow’’ 404 F.2d 196, 200 (2d Cir. 1968) where

he stated; ‘‘our duty as an inferior federal court is to apply

as best we can, the standards’’ of our superior courts.

Furthermore, the trustee’s attempts to distinguish our

facts from those in Straus-Duparquet, supra, and to align

our issues more closely with In re Mammoth Mart, supra,

lack sufficient merit. The First Cireuit rejected a factual

distinction between the two cases when it stated in

Mammoth Mart that ‘‘implicit in the foregoing discussion,

we find the reasoning in support of the contrary result

in Straus-Duparquet . . . unpersuasive. There (Straus-

Duparquet) the court concluded that severance pay claims

similar to appellants’ were entitled to first priority .. .’’

536 F.2d at 955.

The fact that we are dealing primarily with non-union

employment contracts instead of with a full scale union

collective bargaining agreement or with an unsuccessful

29a

Chapter Xl proceeding instead of with a successful ar-

rangement, are factors which a higher court may employ

to further narrow the breadth of Straus-Luparquet. ‘The

Second Circuit first clarified the doctrine in /n re Umishops,

supra, footnote 1 (one) where it states that ‘*(t)he cases

involving severance pay under collective bargaining con-

tracts, such as Straus-Duparquet correctly define severance

pay as compensation for termination of employment and

hence usually an expenses of administration, but they are

not determinative of the issue before us.’’ The court evi-

dently has recognized that the facts: and the equitable

interests in particular situations do not require first pri-

ority treatment of severance pay claims. Further guidance

however, is needed in this area.

In light of the foregoing findings of fact and conclusions

of law, this court feels compelled to follow the direction

of the Second Circuit and instructs the trustee to compute

severance pay for each former employee of Grant dis-

charged during the Chapter XI proceeding and to pay it

in full as an expense of administration under Sec. 64(a)

(1) of the Bankruptcy Act, 11 U.S.C. See. 104(a) (1).

Settle order in conformity with the foregoing.

Dated: New York, New York

June 22, 1978

/s/ Joun J. Gateay

Bankruptcy Judge

30a

UNITED STATES DISTRICT COURT

SoutHERN District or New YorxK

In re

W. T. Grant Company, > Bankruptcy No.

Bankrupt. 75 B 1735

ORDER AUTHORIZING AND APPROVING PAYMENT

OF SEVERANCE PAY BENEFITS

Upon the application of Charles G. Rodman, as Trustee

of the Estate of W. T. Grant Company, Bankrupt (the

‘‘Trustee’’), dated May 10, 1977, for instructions as to the

disposition of claims made by former employees of W. T.

Grant Company (‘‘Grant’’), other than former officers and

directors, for vacation and severance pay benefits, the hear-

ing held on June 28, 1977 to consider said application at

which the appearances of interested parties were noted

in the record, the objections interposed to the Trustee’s

recommendations and upon all of the proceedings had be-

fore the court, the decision and order dated June 7, 1978,

directing the disposition and satisfaction of claims for

vacation pay benefits, and the court having filed its written

opinion dated June 22, 1978, as to the disposition and satis-

faction of claims for severance pay benefits, and sufficient

cause appearing therefor, it is

OrvERED that the portion of proofs of claim filed with

the court by former employees of Grant who were dis-

charged during the aborted Chapter XI case for severance

pay benefits, other than former officers and directors, to

the extent that the Trustee is hereafter authorized and di-

rected by order of the court to make distributions from

the assets of the bankrupt estate to satisfy such claims,

upon the authority of In re Straus-Duparquet, Inc., 386

F.2d 649 (2d Cir. 1967) and In re Unishops, Inc., 553 F.2d

305 (2d Cir. 1977), be, and they hereby are, claims entitled

to priority as costs and expenses of administration of the

3la

aborted Chapter XI case under Section 64a(1) of the

Bankruptcy Act, 11 U.S.C. §104a(1), entitled to priority

after the payment of the costs and expenses of the bank-

ruptcy. case under Chapters I-VII of the Bankruptey Act;

and it is further

OrvereEp that the gross amount of such claims of former

employees for severance pay benefits are to be calculated

in accordance with the policies, procedures and practice of

Grant or, where appropriate, its collective bargaining agree-

ments, in effect or enforceable in respect of such benefits

as of October 1, 1975 as described during the hearing held

on June 28, 1977 and incorporated in the record of that

hearing.

Dated: New York, New York

July 21, 1978

/s/ Joun J. Gatcay

Bankruptcy Judge

32a

APPENDIX IV

33a

UNITED STATES COURT OF APPEALS

For Tue Nintsa Crrcuitr

Filed

Jan 21 1980

, Richard H. Deane

Loca Jowr Executive Boarp, US. Comer Aaiouab

AFL-CIO, et al.,

Plawntiff-Appellant, No. 76-3066

vB, E OPINION

Horex Crecte, Inc., et al.,

Defendant-A ppellee.

APPEAL FROM THE UNITED STATES

DISTRICT COURT FOR THE

SOUTHERN DISTRICT OF CALIFORNIA

Before: Wricut, Wattace, and AnvErson, Circuit Judges

Wauiace, Circuit Judge:

This appeal requires us to address tensions between the

language and underlying policies of the Bankruptey Act

and the National Labor Relations Act (NLRA). The dis-

trict court upheld the decision of the bankruptcy judge

relieving Hotel Circle, Inc. (Hotel Circle) from the obliga-

tions of a collective bargaining agreement with Local Joint

Executive Board, AFL-CIO (Union). Local Joint Execu-

twe Board, AFL-CIO v. Hotel Circle, Inc., 419 F. Supp. 778

(S.D. Cal. 1976). The Union alleges that the district court

erred in defining the scope of section 313(1) of the Bank-

ruptey Act, 11 U.S.C. § 713(1), which allows the bankruptcy

court to permit rejection of executory contracts of the

debtor, and erred in holding that a bankruptcy receiver

lacks authority to assume unilaterally or enter into long-

term collective bargaining agreements. We affirm.

I

On October 10, 1974, Hotel Circle filed for protection

under Chapter XI of the Bankruptcy Act, 11 U.S.C. §§ 701

34a

et seq. After the Chapter XI petition was filed, the busi-

ness was operated by the debtor in possession until a re-

ceiver was appointed on July 21, 1975. During this time,

Hotel Circle continued to operate under a 1973 collective

bargaining agreement between it and the Union, which was

scheduled to expire in 1977. Hotel Circle was a fnember of

the Restaurant-Hotel Employers’ Council (Council), the

multi-employer group which had negotiated the 1975 agree-

ment. After its appointment, the receiver sent a represen-

tative to participate in discussions between the Council and

the Union on the subject of modifying and extending’ the

agreement. On August 18, 1975, the receiver’s represen-

tative was among those who voted to accept a proposed wage

increase and to extend the life of the existing agreement.

Although not expressly indicating that he was bound by the

renegotiated contract, the receiver paid the hotel’s employ-

ees in accordance with the higher wage scale of the new

agreement.

In the meantime, the receiver negotiated a proposed

sale of the Le Baron Hotel, which sale was conditioned on

the purchaser taking clear of any existing collective bar-

gaining agreement. In December 1975 the receiver applied

for an order authorizing sale of the hotel, and the Official

Creditors’ committee filed a motion seeking to reject vari-

ous executory contracts, including the collective bargaining

agreement between the Council and the Union. On De-

cember 15, 1975, the bankruptcy court authorized the sale of

the hotel, and on January 6, 1976, the court issued an order

rejecting the collective bargaining agreement.

The Union contends that the district court erred on

several grounds in sustaining the decision of the bankruptcy

judge allowing rejection of the agreement. First, it con-

tends that the rejection provision of Chapter XI of the

Bankruptcy Act, section 313(1), 11 U.S.C. § 713(1), should

properly be read as excluding collective bargaining agree-

ments because of their unique nature and the policies under-

v

35a

lying the labor laws. Second, assuming the bankruptcy

court may allow rejection of a collective bargaining agree-

ment, the Union contends that the receiver had authority

to affirm the agreement, thereby binding the estate, and did

in fact affirm it by entering into negotiations for its modi-

fication and extension and by adopting its terms. The

Union claims that the district court erroneously decided

this issue because it improperly concluded that a receiver

is not an ‘‘employer’’ under the NLRA. Finally, the Union

contends that the receiver had authority to, and did in fact,

enter into the modified agreement, arguing that this au-

thority stemmed from his order of appointment from the

bankruptcy court as well as from his duty to bargain under

the NLRA. It also argues that the rejection provision re-

lied on by the bankruptcy court to ‘‘reject’’ the modified

agreement does not apply to contracts of the receiver.

These contentions will be dealt with in turn.

We have never confronted the question whether section

313(1) of the Bankruptcy Act, 11 U.S.C. § 713(1), allowing

the rejection of executory contracts of the debtor, applies to

collective bargaining agreements. Acknowledging that the

weight of authority is to the contrary, the Union urges us

to find that such an agreement is not an ‘‘executory con-

tract’’ for purposes of section 313(1).!_ The Union en-

courages us to construe the language of the Bankruptcy

Act so that it would be consistent with the apparently

absolute language of section 8(d) of the NLRA, 29 U.S.C.

§ 158(d), which requires certain procedures and conditions

for the termination or modification of a collective bargain-

ing agreement.

The NLRA should govern, according to the Union, be-

cause labor agreements are not ordinary executory con-

tracts, but rather generalized codes for industrial peace.

John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543, 550

36a

(1964) ; United Steelworkers v. Warrior & Gulf Navigation

Co., 363 U.S. 574, 578-80 (1960). The Union argues that the

labor law policy of promoting industrial peace and stability

for employees, John Wiley & Sons, Inc. v. Livingston, supra,

376 U.S. at 549, suggests that Congress did not intend to

include labor agreements among the ‘‘executory contracts”’

that could be rejected under the Bankruptey Act. It con-

tends that this interpretation is further bolstered by the

inadequacy of the Bankruptcy Act’s remedy of actual

damages for rejected contracts. Since many of the benefits

of labor agreements are intangible, such agreements do not,

according to this argument, lend themselves to damage

measurement as would a commercial agreement.

These and other arguments were recently considered by

the Second Circuit in Shopmen’s Local 455 v. Kevin Steel

Products, Inc., 519 F.2d 698 (2d Cir. 1975). That court held,

consistent with prior district court cases, that section 313(1)

applies to labor agreements. See, e.g., Carpenter’s Local

2746 v. Turney Wood Products, Inc., 289 F. Supp. 148,

147-50 (W.D. Ark. 1968) ; In re Overseas National Airways,

Inc., 238 F. Supp. 359, 361 (H.D.N.Y. 1965); In re Klaber

Bros., Inc. 173 F. Supp. 83, 85 (S.D.N.Y. 1959). The

court in Kevin Steel relied in part on the unqualified

statutory language of the Bankruptcy Act and on the fact

that Congress had previously demonstrated its ability to

carve labor agreements out of a general grant of power

to reject executory contracts. 519 F.2d at 701-02. See

Bankruptey Act §77(n), 11 U.S.C. §205(n) (prohibiting

bankruptcy court or trustees from changing wages or work-

ing conditions of railroad employees except in manner

prescribed by Railway Labor Act). At the same time, the

court acknowledged that ‘‘the issue is not a simple one to

be decided only by a literal reading of section 313(1).”’

Id. at 703. Therefore, the Second Circuit examined the

policies of the acts in question and determined, correctly

we think, that the Bankruptcy Act’s provisions were in-

37a

tended to prevail. The court stated that a debtor in posses-

sion or receiver under Chapter XI of the Bankruptey Act

is, in a real sense, not the same entity as the pre-bankruptcy

company. It is ‘‘[a] new entity... with its own rights and

duties, subject to the supervision of the bankruptcy court.’

Id. at 704, The court concluded that this new entity is not

a “‘party’’ to the existing labor agreement for purposes

of the section 8(d) termination restrictions, reasoning that

to require the debtor-in-possession or receiver to assume an

outstanding labor contract would place the new entity ‘‘in

a worse position than a successor employer, who is generally

not bound by the existing labor agreement. See NLRB v.

Burns Int’l Security Services, Inc., 406 U.S. 272, 281-91

(1972).°? Id?

We recognize, on the one hand, that this analysis is not

inexorable and is based on a policy choice which emphasizes

the changed status of the debtor in bankruptcy for purposes

of analyzing its obligation under 8(d). The Second Circuit

has acknowledged that Kevin Steel analogized the position

of a receiver in bankruptcy to that of a successor employer,

and thus reasoned that a raceiver is not a ‘‘party’’ to the

labor agreement, ‘‘for the narrow purpose of resolving

otherwise conflicting provisions of the labor laws.’” Truck

Drivers Local 807 v. Bohack Corp., 541 F.2d 312, 320 (2d

Cir. 1976). On the other hand, we are convinced that the

analogy to successorship cases in this limited area is valu-

able, and we agree that it would be anomalous to bind the

receiver in reorganization proceedings when a successor

employer is not bound. See NLRB v. Burns Int’l Security

Services, Inc., supra, 406 U.S. at 287-88 (refusing to impose

a labor agreement on successor employer in part bacause

to do so might discourage needed transfers of capital).

The policy of allowing a new start to a debtor in reorganiza-

tion proceedings provides an even stronger reason for not

automatically imposing the existing labor agreement than

does the policy recognized in Burns of encouraging the flow

of capital.

38a

It is significant that in Burns the Supreme Court re-

jected the argument, analogously made here, that the unique

nature of labor agreements and the policy of promoting

stability for employees should overcome the corresponding

rights and interests of a successor employer. The Court

stressed that the cases relied on by the union there involved

suits to compel arbitration and reflected ‘‘ ‘the preference

of national labor policy for arbitration as a substitute for

tests of strength between contending forces.’’’ NLRB v.

Burns Int’l Security Services, Inc., supra, 406 U.S. at 286

(quoting John Wiley & Sons, Inc. v. Livingston, supra, 376

U.S. at 549).

Similarly, we conclude that the unique features of labor

agreements do not overcome the plain language of the

Bankruptcy Act and the policies embodied in Chapter XI

proceedings. While we recognize that important employee

interests are at stake when rejection of a labor agreement

is considered, the policies of the Bankruptcy Act are de-

signed to assist failing businesses, a goal in which employees

ultimately have a stake as well. We do not believe that the

power to reject labor agreements found to be onerous and

burdensome to the debtor’s estate is inconsistent with the

policies of the labor laws.?

iil

We now consider the contention that the receiver pre-

vented the subsequent rejection of the collective bargaining

agreement when he affirmed the contract and thereby bound

the estate. First, we put to one side a sub-issue which we do

not believe is dispositive of the main question. The Union

contends that the district court failed to confront the tension

between the NLRA and the Bankruptcy Act on this question

because it misconstrued the status of a receiver under the

labor laws. Relying on the Kevin Steel conclusion that a

receiver is a new entity which is not a ‘‘party’’ to a labor

agreement for section 8(d) purposes, the district court went

39a

on to conclude that ‘‘[t]he bankruptcy entity is not an

employer within the meaning of the National Labor Rela-

tions Act unless the entity becomes a party to the collective

bargaining agreement.’’ Local Joint Executive Board,

AIL-C1O vy. Hotel Circle, Inc., supra, 419 F. Supp. at. 785.

The Union points to cases holding that receivers are em-

ployers under the labor laws and, as such, are liable for

unfair labor practices and are obligated to bargain under

the Act. In re American Buslines, 151 F. Supp. 877, 882

(D. Neb. 1957); NLRB v. Baldwin Locomotives Works, 128

F.2d 39, 43 (3d Cir. 1942); NERB v. Bachelder, 120 F.2d

574, 576 (7th Cir.), cert. denied, 314 U.S. 647 (1941). As the

Union observes, Kevin Steel also recognized that the new

entity of a bankruptcy reorganization proceeding must

comply generally with the NLRA. Shopmen’s Local 455 v.

Kevin Steel Products, Inc., supra, 519 F.2d at 704.

While we agree that a receiver has the general duty to

bargain and otherwise comply with the NLRA, we are not

persuaded that the receiver’s status as an employer is dis-

positive of the issue as to his authority to adopt a collective

bargaining agreement. The receiver’s duty to bargain does

not imply that he possesses all of the power and responsi-

bilities of a regular employer. Nor does it change the fact

that he is an officer of the bankruptcy court possessing

limited, strictly construed authority. See, e.g., Chicago

Deposit Vault Co. v. McNulta, 153 U.S. 554, 561 (1894).

Therefore, the fact that he has such a duty does not answer

the question whether he may adopt a collective bargaining

agreement without seeking the approval of the court.

We are compelled to reject the district judge’s conclusion

that a receiver is not an employer under the NLRA unless

he becomes a ‘‘party’’ to the labor agreement, because that

reasoning could lead to confusion if applied outside this

limited area of agreement adoption. We believe, however,

that he accurately considered the legal authorities relating

to the power of receivers to assume executory agreements

40a

and appropriately reconciled the demands of the bankruptcy

and labor acts. We thus read the district court opinion as

concluding only that a receiver is not a typical employer

under the NLRA insofar as his 8(d) duty to bargain is

limited by his lack of legal authority to affirm an executory

labor agreement without the permission of the bankruptcy

court. Cf. Truck Drivers Local 807 v. Bohack Corp., supra,

541 F.2d at 320 (observing that the statement that the

debtor is not a ‘‘party’’ cannot be taken literally since one

not a party technically cannot affirm or reject an agree-

ment).

We now address the issue whether the district court was

correct in concluding that the receiver lacked authority to

bind the debtor’s estate by affirming the contract. We begin

with the basic principles that the ‘‘order authorizing the

receiver to operate the business does not, in itself, confer

unlimited authority to operate the... [h]otel,’’ Local Joint

Executive Board, AFL-CIO v. Hotel Circle, Inc., supra, 419

F’. Supp. at 786 (quoting 8 Collier on Bankruptcy {| 6.35[8],

pp. 961-65 (14th ed. 1976)), and that ‘‘[p]Jarties dealing

with a receiver are charged with knowledge of the extent of

any restrictions upon his authority.’’ Jd. (citing In re Yel-

low Transit Freight Lines, 207 F.2d 602, 606 (7th Cir.

1953)). As the receiver’s order of appointment by the

bankruptcy court does not appear to grant any unusual

authority, the question here is essentially one of law and

not of construction of the appointing order.

While neither we nor the Supreme Court has passed on

the question before us, the more persuasive cases from other

jurisdictions hold that ‘‘ ‘assumption or adoption of the

contract can only be effectuated through an express order

of the [bankruptcy] judge.’’’ In re American National

Trust, 426 F.2d 1059, 1064 (7th Cir. 1970) (quoting 6 Collier

on Bankruptcy { 3.23[5], p. 578 (14th ed. 1976)). See also

Texas Importing Co. v. Banco Popular de Puerto Rico, 360

4la

F.2d 582, 584 (5th Cir. 1966). The basic reasoning for

this view is expressedy Collier:

The general rule that economy of administration calls

for close, strict, and active control by the court of all

administrative expenditure seems to lead to the con-

clusion that it is improper for a trustee to assume exec-

utory contracts on his own responsibility.

4A Collier on Bankruptcy { 70.43[5], at 531 (14th ed. 1976).

Similarly, we have expressed the view that ‘‘[i]t is well

settled bankruptcy law that on important decisions, what-

ever their character, the trustee must get the court’s ap-

proval....’? Newport v. Sampsell, 233 F.2d 944, 946 (9th

Cir.), cert. denied, 352 U.S. 942 (1956).

Indeed, as the bankruptcy court is vested with exclusive

jurisdiction over the property of the debtor, we believe its

authority to allow rejection of burdensome contracts gives

it a needed flexibility that should not be relinquished except

by the court. Therefore, we agree with the Fifth Circuit

that the Act should not be construed to grant the trustee or

receiver authority to ‘‘bar the court from exercising its

statutory power to authorize the rejection of such a con-

tract... .’’ Texas Importing Co. v. Banco Popular de

Puerto Rico, supra, 360 F.2d at 584. This concern for

needed flexibility is particularly compelling as against the

Union’s contention that the receiver should be viewed as

having affirmed the contract when he knowingly conforms

to its terms. See Pacific Western Oil Co. v. McDuffie, 69

F.2d 208, 213 (9th Cir.), cert. denied, 293 U.S. 568 (1934)

(recognizing the receiver’s need to be able to conform to the

terms of an existing contract experimentally while deciding

whether the contract should be rejected or affirmed).

It should come as no surprise that there is conflicting

authority on this issue since the power to assume executory

contracts is not found in the Act, but rather is inferred

from the bankruptcy court’s power to approve rejection

42a

of such agreements. 8 Collier on Bankruptcy, { 315[6],

at 204-05 (14th ed. 1976). Some courts have recognized a

receiver’s right to affirm executory contracts, relying upon

precedent from pre-Bankruptcy Act reorganization under

equity, in which receivers had that authority. E.g., In re

Public Ledger, Inc., 161 F.2d 762 (3d Cir. 1947). This

practice, in turn, has been criticized on the ground that the

Bankruptcy Act is intended to involve ‘‘a higher degree

of judicial supervision and responsibility.’’ 4A Collier on

Bankruptcy, { 70.43, at 531-32 n.30b. We are in accord

with the latter view and agree with the district court that

‘*[t]he assumption or rejection of executory agreements

affects the outcome of the chapter proceeding and should

proceed under the supervision of the court.’’ Local Joint

Execute Board, AFL-CIO v. Hotel Circle, Inc., supra,

419 F. Supp. at 787.

The Union relies primarily on In re Public Ledger, Inc.,

supra, 161 F.2d 762, which held that a receiver or trustee

has authority to assume a labor agreement without seeking

the approval of the bankruptcy court and may do so by

knowingly conforming to its terms. Jd. at 767. The case

involved an employee’s claim for vacation pay that had

accrued under a collective bargaining agreement entered

into prior to the outset of bankruptcy proceedings. Trus-

tees had paid wages according to the terms of the agree-

ment, but the bankruptcy court denied claims for vacation

pay on the ground that it had never approved assumption

of the agreement. The Third Circuit stated that ‘‘[i]t is

unreasonable to asSume that the [bankruptey] court con-

templated anything but the continuance of the labor con-

tract as the basis for the continued services of the em-

ployees.’’ Jd. In addition, the court focused on the

equities involved, observing that ‘‘the claimant had worked

for a year and was entitled to his vacation pay.’’ Id. at 768.

It appears to us, however, that the court in Public

Ledger could have ruled on a narrower ground‘ and did

43a

not adequately consider the implications of granting au-

thority to a receiver or trustee to adopt a long-term col-

lective bargaining agreement. We have not found any

cases holding that a receiver or trustee had authority to

adopt a long-term collective bargaining agreement that

actually bound the debtor’s estate beyond the term of his

trust, and, like the district court, we find the reasoning

against such authority ‘‘even more persuasive if the as-

sumption of an executory contract will bind the estate in

the future rather than merely establish a priority as an

administrative expense.’’ Local Joint Executive Board,

AFL-CIO v. Hotel Circle, Inc., supra, 419 F. Supp. at 788.

Since the equities of cases such as Public Ledger can be

addressed without granting receivers authority to bind

the debtor and without removing needed supervision power

and flexibility from the bankruptcy court, we conclude that

the receiver lacked authority to adopt the 1973-1977 labor

agreement.’ Consequently, the bankruptcy court retained

power to authorize rejection of the agreement.®

IV

We address, finally, whether the bankruptcy court could

void the new agreement extending and modifying the pre-

bankruptcy contract between Hotel Circle and the Union.

This issue turns on whether the receiver was authorized to

enter into a long-term collective bargaining agreement.’

Courts do not recognize contracts that exceed the limited

authority of a receiver, In re Avorn Dress Co., 79 F.2d 337

(2d Cir. 1935), and parties dealing with a receiver are

charged with knowledge of his limited authority. Jd.; In

re Yellow Transit Freight Lines, supra, 207 F.2d at 606.

Courts generally will not retroactively validate contracts

which exceeded the authority of the receiver. In re Avorn

Dress Co., supra, 79 F.2d 337 ; Local Joint Executive Board,

AFL-CIO v. Hotel Circle, Inc., supra, 419 F. Supp. at

790 & n.2.

44a

The Union contends, however, that the receiver pos-

sessed authority to enter into the new contract. It argues

that we should read the language of the receiver’s order of

appointment together with the receiver’s duty to bargain

under the labor laws to find that he had such authority. The

order of appointment authorizes the receiver to ‘‘enter into

any contracts incidental and usual to the operation of said

business and the management, and preservation of said

property.’’? The Union contends that a labor agreement

is ‘‘incidental and usual’’ to the operation of a hotel, and it

argues that receivers will be unable to secure the labor

needed to operate the business if they are unable to enter

into such agreements. In most respects, their arguments

here parallel those discussed earlier in which they con-

tended that receivers may unilaterally assume existing

agreemeuts. We reject these arguments for basically the

same reasons.

We first examine the language of the order of appoint-

ment. The Union emphasizes that long-term collective

bargaining agreements are typical in the hotel industry,

suggesting that this makes them ‘‘incidental and usual.’’

We believe that the phrase ‘‘incidental and usual’’ has a

more restrictive meaning, and that it refers to contracts

necessary to the daily operation of the business. As stated

by the Supreme Court:

It is undoubtedly true that a receiver, without the

previous sanction of the court ... may incur ordinary

expenses or liability for supplies, material, or labor

needed in the daily administration of . . . property

committed to his care as an officer of the court; but it

seems equally well settled that the courts decline to

sanction the exercise of this discretion on the part of

receivers in respect to large outlays, or contracts ex-

tending beyond the receivership, and intended to be

binding upon the trust.

45a

Chicago Deposit Vault Co. v. McNulta, supra, 153 U.S. at

061. Cf. Newport v. Sampsell, supra, 233 F.2d at 946 (it

is settled that the trustee must get the court’s approval on

all important decisions).

We are not persuaded that the relevant case law jus-

tifies a diiferent result in the case of long-term collective

bargaining agreements. The most illustrative example of

a court sanctioning a receiver or debtor-in-possession enter-

ing into a labor agreement is ln re Wil-Low Cafeterias, Inc.,

111 F.2d 429 (2d Cir. 1940). In that case, much as in In re

Public Ledger, Inc., discussed earlier, employees sought

to obtain accrued vacation pay that had been denied by the

trustee on grounds that the debtor’s post-bankruptcy con-

tract was invalid as beyond the authority granted the

debtor-in-possession by the bankruptcy court. We agree

with the district judge that the court in Wil-Low recognized

the agreement ‘‘for the purpose of awarding benefits ac-

crued under the contract,’’ Local Joint Executive Board,

AFL-CIO v. Hotel Circle, Inc., supra, 419 F. Supp. at 786,

and we would apply the same analysis developed in our dis-

cussion of In re Public Ledger, Inc. Indeed, Wil-Low ap-

pears to acknowledge the limitation we are recognizing as

the court specifically reserved the question whether the

debtor-in-possession could have bound the estate in the

future without permission of the court: ‘‘It may be that

the court would have had the power to rescind such a

contract so far as it remained unperformed, but no such

thing was attempted.’’ In re Wil-Low Cafeterias, Inc.,

supra, 111 F.2d at 431.

We conclude, therefore, that the district court was cor-

rect in deciding that ‘‘[t]he order authorizing the receiver

to continue to operate the business of the debtor, did not

grant the receiver the authority to enter into... the modi-

fied collective bargaining agreement. . . .’’ Local Joint

Executive Board, AFL-CIO v. Hotel Circle, Ine., supra, 419

F. Supp. at 791. This conclusion is unaffected by the re-

46a

ceiver’s status as an employer under the labor laws and

his corresponding duty to bargain. The receiver is required

to retain any grievance machinery to process employee

disputes, and he is obligated to meet and confer with the

employee bargaining representative as required by section

8(d). Nevertheless, his section 8(d) duties are limited to

the extent that he cannot enter inte a long-term collective

bargaining agreement without obtaining the permission

of the bankruptcy court.

It may at first glance seem harsh to allow the debtor

relief from the contract entered into and relied upon by

the Union. We have already observed, however, that parties

dealing with an officer of the bankruptcy court are assumed

to know the limits of his authority. In addition, it is not

as though a union is without an option in such cases. Both

with reference to adoption of an existing agreement as

well as the negotiation of a new one, a union may insist

upon obtaining the authorization of the bankruptcy court.

See Texas Importing Co. v. Banco Popular de Puerto Rico,

supra, 360 F.2d at 584-85; Philadelphia Co. v. Dipple, 312

U.S. 168, 174 (1941). Unions should be on notice that court

approval is required if a long-term collective bargaining

agreement, with potential for binding the estate beyond

the term of receivership, is to be affirmed or validly entered

into by the parties.

AFFIRMED.

47a

FOOTNOTES

1 The section provides:

Upon the filing of a petition, the court may, . . .—

(1) permit the rejection of executory contracts of the

debtor, upon notice to the parties to such contracts, and

to such other parties in interest as the court may desig-

nate.

*In Kevin Steel, the court also addressed the argument, not pre-

sented to us, that businesses will enter bankruptcy proceedings to

free themselves of labor agreements. Shopmen’s Local 455 v. Kevin

Steel, Inc., supra, 519 F.2d at 705-06. Our decision does not reach

the issue but leaves room for a later determination whether, when the

debtor is in bad faith, the agreement is therefore not onerous or

burdensome. See In re Mamie Conti Gowns, Inc., 12 F. Supp. 478,

480 (S.D.N.Y. 1935).

We also do not need to address the question whether the bank-

ruptcy court should apply a stricter standard for authorizing the

rejection of collective bargaining agreements as a means of reconciling

the policies of the labor and bankruptcy laws. Compare Shopmen’s

Local 455 v. Kevin Steel Products, Inc., supra, 519 F.2d at 706-07,

with Local Joint Executive Board, AFL-CIO v. Hotel Circle, Inc.,

supra, 419 F. Supp., at 789.

3In some cases the bankruptcy court will not need to reach the

rejection issue. For example, if an extension of an old contract or a

new contract does not receive approval of the bankruptcy court, the

new employer would not be bound by it, e.g., NLRB v. Burns Int’l

Security Services, Inc., 406 U.S. 272 (1972), and that might well be

dispositive of the case. That determination would be based upon

whether or not the remaining time of the old contract, here from 1975

to 1977, needs to be rejected in order to fulfill the purposes of the

Bankruptcy Act. Under Burns and other cases, there may not be a

need for the bankruptcy court to act any further as the new owner

may be insulated under the successor employer doctrine. E.g., id.

On the other hand, in some circumstances a new employer may have

the responsibility to arbitrate over provisions in the old contract

arguably intended to be given continuing effect. See John Wiley &

Sons, Inc. v. Livingston, 376 U.S. 543, 552-55 (1964). Whether

such conce*ns are present, and whether the bankruptcy court there-

fore reasonably believes that a rejection order is necessary as a con-

condition of the new employer purchasing the old company, must be

determined on a case-by-case basis. Here we cannot say that the

bankruptcy court was in error when it considered that there was a

need to reject the remaining part of the whole contract.

4In In re Schenectady Ry., 93 F. Supp. 67 (N.D.N.Y. 1950),

for example, the court found that trustees in a Chapter X proceed-

48a

ing were obligated to pay accrued pension benefits, but still concluded

that the contract had not been assumed nor could be without court

approval. Since the trustee’s order of appointment authorized him

to pay the operating expenses of the business, including wages, the

court found that the trustee had adopted certain employee benefits,

including pensions and vacation pay, as part of those wages when he

used the labor contract ‘as a yardstick or measure of obligations” and

knowingly conformed to the agreement’s terms. /d. at 69. Although

“equitable considerations” required that the pensions be paid as ‘‘a

part of operating expense . . . during the period that the parties

knowingly conform to the terms of the contract,” id. at 70, the court

still held that the trustee could not adopt the agreement because it

“might seriously encumber the assets [of the debtor] without the

consent and approval of the Court.” Jd. at 69. See also In re Capital

Service, Inc., 136 F. Supp. 430, 437 (S.D. Cal. 1955) (finding vaca-

tion pay to be an administration expense without reaching assump-

tion question on ground that debtor ‘rehired the employees at the

old rates of pay and under the old terms and conditions of employ-

pred ; 4A Collier on Bankruptcy {| 70.43[5], at 531 n.30b (14th ed.

1976).

5 Thus, despite the Second Circuit’s persuasive reasoning on the

applicability of section 313(1) to labor agreements, we reject their

additional conclusion that a receiver may assume an executory con-

tract by conforming to its terms. See Brotherhood of Railway, Air-

line and Steamship Clerks y, REA Express, Inc., 523 F.2d 164, 170

(2d Cir.), cert. denied, 423 U.S. 1017 (1975) (relying on In re

Public Ledger, Inc., supra).

6 Having concluded that the receiver lacked authority to affirm

a long-term collective bargaining agreement, we need not address

whether the district court erred in finding that the receiver did not

manifest a clear intent to affirm the contract.

7 Like the district court, we do not reach the question whether

section 313(1), allowing rejection of executory contracts of “the

debtor,” applies to valid contracts of the receiver.

é