# Appendix — Morgan Guaranty Trust Co. v. Rinier

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 1980
- **Citation:** 446 U.S. 983

## Text

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.

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APPENDIX I

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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.

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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-

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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

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APPENDIX II

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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‘(‘(

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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

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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

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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.

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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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385006_1868%3A2. Public record. Not legal advice.