Petition — National Labor Relations Board v. Bildisco & Bildisco

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OCTOBER TERM, 1982

NATIONAL LABOR RELATIONS BOARD, PETITIONER

BILDISCO AND BILDISCO, DEBTOR-IN-POSSESSION, ET AL.

PETITION FOR A WRIT OF CERTIORARI TO THI

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

REX E. LEE

Solicitor General

LAWRENCE G. WALLACE

Deputy Solicitor General

CAROLYN F. CORWIN

Assistant to the Solicitor General

Department of Justice

Washington, D.C. 20530

(202) 633-2217

WILLIAM A. LUBBERS

General Counsel

JOHN E. HIGGINs, Jr.

Deputy General Counsel

ROBERT E. ALLEN

Associate General Counsel

NoRTON J. COME

Deputy Associate General Counsel

LINDA SHER

Assistant General Counsel

JAMES Y. CALLEAR

Attorney

National Labor Relations Board

Washington, D.C. 20570

QUESTIONS PRESENTED

1. Whether a bankruptcy court, in reorganization

proceedings under Chapter 11 of the Bankruptcy

Code, 11 U.S.C. (Supp. V) 1101 et seg., may author-

ize a debtor-in-possession to reject a collective bar-

gaining agreement without a threshold showing that

the business is likely to fail unless the agreement is

rejected.

2. Whether the National Labor Relations Board

may properly find that a debtor-in-possession violated

Section 8 (a) (5) of the National Labor Relations Act,

29 U.S.C. 158(a)(5), by unilaterally changing the

terms of a collective bargaining agreement during the

period between filing of a Chapter 11 petition and

entry of a court order authorizing rejection of the

agreement.“

* In addition to the parties listed in the caption, Local 408,

International Brotherhood of Teamsters, Chauffeurs, Ware-

housemen and Helpers of America, participated in the pro-

ceedings below, as appellant in No. 81-2140, and as intervenor

in No. 81-2238.

(1)

TABLE OF CONTENTS

Page

I ß 1

((/ / ee 1

rr. aR eT TR 2

ITI deci Biinictsincicigailensctseiinnininsiecnaniciniatinsinnibenegseninamennensanienets 5

Reasons for granting the petition —...................-........ 9

— 27

rer 1a

1K tiletieniiaieteerenanienioeeibtatiiatnininapeteeiees 27a

((( - - 11 8 29a

IE TDs late aianiteierninanaiineitiatenaiaininiatbeiniaiaeinti 44a

K 49a

1K r 50a

TABLE OF AUTHORITIES

Cases:

Alan Wood Steel Co., In re, 449 F. Supp. 1658 14

Alfar Dairy, Inc., In re, 458 F. 2d 1258, cert. de-

r 23

Allied Chemical Workers Local Union No. 1 v.

Pittsburgh Plate Glass Co., 404 U.S. 157 11

Allied Technology, Inc., In re, 8 Bankr. 368 14

Bel Air Chateau Hospital, Inc., In re, 106 LR. R. M.

/ ee RESO eee re 26

Brada Miller Freight System, Inc., In re, 16 Bankr.

1002, appeal docketed, No. 82-7048 (11th Cir.

r ESR ae ee 14

Brotherhood of Railway Employees v. REA Ex-

press, Inc., 523 F.2d 164, cert. denied, 423 U.S.

a 8, 12, 14, 15, 17, 20

C&S Industries, 158 N. L. R. B. 4 11

Cannon v. University of Chicago, 441 U.S. 677 15

(1)

Cases—Continued Page

Connecticut Celery Co., In re, 106 L.R.R.M. (BNA)

% ED SS eee ey mee Be nN ae ne Oe 14

David A. Rosow, Inc., In re, 106 LR. R. M. (BNA)

. 14

First National Maintenance Corp. v. NLRB, 452

cc 11

Hanover Star Milling Co. v. Metcalf, 240 U.S. 408. 21

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

C 16

Local Joint Executive Board v. Hotel Circle, Inc.,

D Re 15

Lorillard v. Pons, 484 U.S. 575 15

Miles Machinery, In re, No. 81-00888 (Bankr. E. D.

r A TTT 14

Nathanson v. NLRB, 344 U.S. 22 24

NLRB v. Gullett Gin Co., 340 US. 311 15

Oak Cliff-Golman Baking Co., 207 N. L. R. B. 1063,

enforced, 90 L. R. R. M. (BNA) 261 11

Overseas National Airways, Inc., In re, 238 F.

renne 7-8, 14

Penn Fruit Co., In re, 92 L. R. R. M. (BNA) 3548. 14

Price Chopper Supermarkets, Inc., In re, 19 Bankr.

— IE A a" SN Oe oa a 20

Shopmen’s Local Union No. 455 v. Kevin Steel

Products, Inc., 619 F.2d 69s passim

Studio Eight Lighting, Inc., In re, 91 L.R.R.M.

e . . 14

Truck Drivers Local Union No. 807 v. Bohack

r 23, 24, 25

Unishops, Inc., In re, 558 F.2d 300 23

United States v. General Motors Corp., 323 U.S.

13 21

United Steelworkers v. Warrior & Gulf Navigation

S| ES AN AER ame Pe Ors 16

W. T. Grant Co., In re, 620 F.2d 319. cert. denied,

r RE AE Pa nT 23

Statutes and regulation:

Bankruptcy Act, 11 US.C. 1 et seq.:

Section 77(n), 11 U.S.C. 205 nn 12

Section 813 (1), 11 U.S.C. 713(17))2 12

Statutes and regulation Continued Page

Bankruptey Reform Act of 1978 (Bankruptey

Code), 11 U.S.C. (Supp. V) 101 et seq.:

998990 4. 12

I |’ 7,11

11 U.S.C. (Supp. V) 365(g) (i) 9, 19, 22-23, 26

11 U.S. C. (Supp. V) 502 (g) 3 23

11 U.S. C. (Supp. V) 1101 et seo 5

4 SS ee 11

National Labor Relations Act, 29 U.S.C. 151 et

seq.:

Section 2, 29 U.S.C. (& Supp. IV) 152 2

Section 2(1), 29 U.S.C. (Supp. IV) 152(1) .... 10

Section 2(2), 29 U.S.C. 152 (2) 10

Section 8, 39 U.S.C. 166 ............................... 8 2

Section 8 (a) (1), 29 U.S.C. 158 (a) (i) 5, 6, 8

Section 8 (a) (5), 29 U.S.C. 158 (a) ()) 5, 6, 8, 10

Section 8 (d), 29 U.S.C. 158 (d) 7, 10, 11, 12

D . .. men er 6

Miscellaneous:

2 Collier on Bankruptcy (L. King 15th ed. 1982) 23

14 Collier on Bankruptcy (J. Moore & L. King 14th

ats SAR aaa can 23

Cox, Rights Under a Labor Agreement, 69 Harv.

. x 16

H.R. Rep. No. 95-595, 95th Cong., Ist Sess.

een. a 21, 23

Note, Bankruptcy and the Rejection of Collective

Bargaining Agreements, 51 Notre Dame Law.

r 25

Note, Bankruptcy Lau Labor Law—Rejection of

Collective Bargaining Agreements as Executory

Contracts in Bankruptcy, 22 Wayne L. Rev. 165

SIITID nhacucsdbebentiidnenmintiesinadeienininpeniniiaiabidiatihanendsgtaiaiis 25

Note, The Labor-Bankruptcy Conflict: Rejection

of a Debtor’s Collective Bargaining Agreement,

80 Mich. L. Rev. 184 (1981777) 20

S. Rep. No. 95-989, 95th Cong., 2d Sess. (1978) 23

In the Supreme Court of the United States

OCTOBER TERM, 1982

No.

NATIONAL LABOR RELATIONS BOARD, PETITIONER

UV.

BILDISCO AND BILDISCO, DEBTOR-IN-POS SESSION, ET AL.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

The Solicitor General, on behalf of the National

Labor Relations Board, petitions for a writ of cer-

tiorari to review the judgment of the United States

Court of Appeals for the Third Circuit in this case.

OPINIONS BELOW

The opinion of the court of appeals (App. A, infra,

la-26a) is reported at 682 F.2d 72. The decision and

order of the National Labor Relations Board (App.

C, infra, 29a-43a) is reported at 255 N.L.R.B. 1203.

The oral opinions of the district court (App. D, infra,

44a-48a) and the bankruptcy court (C.A. App. 60a-

66a) are unreported.

JURISDICTION

The judgment of the court of appeals (App. B,

infra, 27a-28a) was entered on June 17, 1982. Pur-

suant to orders entered by Justice Brennan on Sep-

(1)

tember 3, 1982, and October 5, 1982, the time for

filing a petition for a writ of certiorari was extended

to and including November 14, 1982. The jurisdiction

of this Court is invoked under 28 U.S.C. 1254(1).

STATUTES INVOLVED

Section 2 of the National Labor Relations Act

(“NLRA”), 29 U.S.C. (& Supp. IV) 152, provides in

pertinent part:

When used in this subchapter—

(1) The term “person” includes one or more

individuals, labor organizations, partner-

ships, associations, corporations, legal repre-

sentatives, trustees, trustees in cases under

title 11, or receivers.

(2) The term “employer” includes any per-

son acting as an agent of an employer, di-

rectly or indirectly * * *.

Section 8 of the National Labor Relations Act, 29

U.S.C. 158, provides in pertinent part:

(a) Unfair labor practices by employer

It shall be an unfair labor practice for an em-

ployer—

(1) to interfere with, or restrain, or

coerce employees in the exercise of the richts

guaranteed in section [7];

(5) to refuse to bargain collectively with

the representatives of his employees

(d) Obligation to bargain collectively

For the purposes of this section, to bargain

collectively is the performance of the mutual

obligation of the employer and the representa-

tive of the employees to meet at reasonable times

and confer in good faith with respect to wages,

hours, and other terms and conditions of employ-

ment, or the negotiation of an agreement, or any

question arising thereunder, and the execution

of a written contract incorporating any agree-

ment reached if requested by either party, but

such obligation does not compel either party to

agree to a proposal or require the making of a

concession: Provided, That where there is in

effect a collective-bargaining contract covering

employees in an industry affecting commerce,

the duty to bargain collectively shall also mean

that no party to such contract shall terminate

or modify such contract, unless the party desir-

ing such termination or modification—

(1) serves a written notice upon the other

party to the contract of the proposed termi-

nation or modification sixty days prior to

the expiration date thereof, or in the event

such contract contains no expiration date,

sixty days prior to the time it is proposed

to make such termination or modification;

(2) offers to meet and confer with the

other party for the purpose of negotiating a

new contract or a contract containing the

Conciliation Service within thirty days

after such notice of the existence of a dis-

pute, and simultaneously therewith notifies

any State or Territorial agency established

to mediate and conciliate disputes within

the State or Territory where the dispute oc-

curred, provided no agreement has been

reached that time; and

(4) continues in full force and effect,

without resorting to strike or lock-out, all

of the terms and conditions of the existing

contract for a period of sixty days after

such notice is given or until the expiration

date of such contract, whichever occurs

later:

The duties imposed upon employers, employees,

and labor organizations by paragraphs (2) to

(4) * * * shall not be construed as requir-

ing either party to discuss or agree to any modi-

fication of the terms and conditions contained in

a contract for a fixed period, if such modifica-

tion is to become effective before such terms and

conditions can be reopened under the provisions

of the contract. * * *

Section 365 of the Bankruptcy Code, 11 U.S.C.

(Supp. V) 365, provides in pertinent part:

(a) Except as provided in sections 765 and

766 of this title and in subsections (b), (c), and

(d) of this section, the trustee, subject to the

court’s approval, may assume or reject any ex-

ecutory contract or unexpired lease of the debtor.

(g) Except as provided in subsections (h) (2)

and (i)(2) of this section, the rejection of an

executory contract or unexpired lease of the

debtor constitutes a breach of such contract or

STATEMENT

1. Bildisco is a New Jersey partnership that sells

and distributes building supply materials. Some ofſem̃-

ployees are represented by Local 408, International

Brotherhood of Teamsters, Chauffeurs, Warehouse-

men and Helpers of America (“the Union”). The

most recent collective bargaining agreement between

Bildisco and the Union was effective from May 1,

1979, through April 30, 1982 (App. C, infra, 35a).

Beginning in January 1980 Bildisco failed to meet

certain obligations under the agreement, including

payment of pension, health, and welfare contribu-

tions, payment of vacation benefits, and remittance

to the Union of dues withheld from employees’ pay.

Beginning in May 1980 it refused to grant wage in-

creases provided for in the agreement (ibid.). On

April 14, 1980, Bildisco filed a petition for reorgani-

zation under Chapter 11 of the Bankruptcy Code, 11

U.S.C. (Supp. V) 1101 et seg. (App. A, infra, 2a).

After that date Bildisco operated its business as

debtor-in-possession. During the summer the Union

filed unfair labor practice charges with the National

Labor Relations Board, and on July 31, 1980, the

Board’s General Counsel issued a complaint alleging

that Bildisco had violated Section 8(a)(5) and

8(a)(1) of the National Labor Relations Act, 29

U.S.C. 158(a)(5) and 158(a)(1), by unilaterally

changing the terms of the collective bargaining agree-

ment (App. A, infra, 4a-5a).

In December 1980, Bildisco filed a motion with the

bankruptcy court requesting permission to reject the

collective bargaining agreement with the Union (C.A.

App. la). At the hearing on Bildisco’s motion on Janu-

ary 5, 1981, the only witness was Sal Valen e, a general

partner of Bildisco. Valente testified that Bildisco’s

creditors were very concerned about the “union situa-

tion” at Bildisco and that if Bildisco could operate

“non-union” it could save around $100,000 in wages

and fringe benefits in 1981 (App. A, infra, 3a)“ Ac-

cording to Valente, this projected savings would make

“a considerable difference in [Bildisco's] potential

profit for 1981” (C.A. App. 36a). On January 15,

1981, the bankruptcy court issued an order granting

Bildisco’s motion to reject the agreement (App. F,

infra, 50a). The Union was given 30 days to file

a claim for damages resulting from the rejection

(ibid.). The district court upheld the bankruptcy

court’s order (App. D and E, infra, 44a-49a).

2. During the same period the Board was process-

ing the unfair labor practice complaint against

Bildisco. On April 23, 1981, the Board granted the

General Counsel’s motion for summary judgment

against Bildisco. The Board concluded that, since

Bildisco had not shown good cause for failing to file

a timely answer,’ the allegations in the complaint

should be deemed admitted (App. C, infra, 30a-33a,

41a). The Board found that Bildisco, as a debtor-in-

possession in reorganization proceedings, was an alter

ego of the pre-bankrupt company and an “employer”

within the meaning of the NLRA, and that it had vio-

lated Sections 8(a)(5) and 8(a)(1) of the Act by

1The cost savings that Valente projected were based on

the assumption of 10 employees in bargaining unit positions,

unilaterally changing the terms of the collective bar-

gaining agreement (App. C, infra, 33a-35a). The

Board ordered Bildisco, inter alia, to cease and desist

from refusing to bargain with the Union and to make

the various payments and remittance of dues required

by the agreement (id. at 38a-41a).

8. The Union’s appeal from the district court’s

order affirming the bankruptcy court’s approval of

rejection and the Board’s application for enforcement

of its order were consolidated in the court of appeals

(App. A, infra, 6a-7a).*

a. The court held first that a collective bargaining

agreement is an executory contract within the mean-

ing of Section 365(a) of the Bankruptcy Code, 11

U.S.C. (Supp. V) 365(a), and thus is subject to re-

jection by a debtor-in-possession (App. A, infra, 10a-

lla). The court also concluded that a debtor-in-

possession is not bound by the restrictions on midterm

contract modification contained in Section 8(d) of the

NLRA, 29 U.S.C. 158 (d) (App. A, infra, 12a, 21a-

22a). However, the court recognized that the usual

test for rejection of executory contracts, i.e., whether

rejection would benefit the estate (the “business judg-

ment” test), should not be applied, since the “impact

of rejection of a collective bargaining agreement on

the rights of workers and the favored status those

rights have been accorded by Congress * * * require

a more stringent examination of the evidence offered

to justify rejection of such a contract” (id. at 12a).

The court accepted the conclusion of the Second Cir-

cuit in Shopmen’s Local Union No. 455 v. Kevin Sieel

Products, Inc., 519 F.2d 698, 707 (1975) (quoting

In re Overseas National Airways, Inc., 238 F. Supp.

The Board intervened in the Union’s appeal, and the Union

intervened in the Board’s application for enforcement.

359, 361 (E. D. N. V. 1965) ), that, in light of the com-

peting statutory policies, rejection of a collective bar-

gaining agreement requires “ ‘thorough scrutiny, and

a careful balancing of the equities on both sides“

(App. A, infra, 12a-13a).

However, the court declined to accept the Second

Circuit’s subsequent ruling in Brotherhood of Railway

Employees v. REA Express, Inc., 523 F.2d 164, 172

(2d Cir.), cert. denied, 423 U.S. 1017 (1975), that

rejection of a collective bargaining agreement should

be permitted only where it could be shown that the

company would collapse and the employees would lose

their jobs unless the agreement was rejected. The

court rejected this “more stringent test” because it

believed that it might be impossible to predict the

success of a reorganization until very late in the

proceedings and that the test unduly exalted perpetu-

ation of the agreement over “the more pragmatic con-

sideration of whether the employees will continue to

have jobs at all” (App. A, infra, 14a-15a). The court

instead fashioned its own standard, under which the

debtor-in-possession must first demonstrate that con-

tinuation of the collective bargaining agreement

would be burdensome to the estate and the bankruptcy

court must then weigh the competing equities, with

particular attention to doing equity between claims

arising under the agreement and other claims against

the debtor (id. at 17a). The court vacated the district

court judgment and remanded the case for recon-

sideration in light of the test it had articulated (id.

at 20a).

b. The court refused to enforce the Board’s order.

It concluded that the Board’s finding that Bildisco

had violated Sections 8(a)(5) and 8(a)(1) of the

NLRA was premised on the view that the debtor-

in-possession is an alter ego of the debtor and thus a

party to the collective bargaining agreement(App. A,

infra, 21a). The court rejected that premise, citing

the conclusion of the Second Circuit in Kevin Steel,

supra, 519 F.2d at 704, that the debtor-in-possession

is a “ ‘new entity * * * created with its own rights

and duties, subject to the supervision of the bank-

ruptey court’ ’(App. A, infra, 21a-22a).

The court further concluded that rejection of the

agreement related back to the day before the Chapter

11 petition was filed, citing 11 U.S.C. (Supp. V)

365(g) (1), and that this meant that in effect no labor

contract existed between the union and the debtor-

in-possession subsequent to April 14, 1980 (App. A,

infra, 24a-25a). The court stated that the rejection

did not affect obligations that had arisen prior to the

date of the petition, so that the Board would not be

precluded from finding an unfair labor practice and

imposing monetary relief based on Bildisco's pre-

petition conduct (id. at 25a-26a). The court remanded

so that the Board could separate pre-petition conduct

from post-petition conduct. The court expressly stated

that if the bankruptcy court again permitted rejection

of the collective bargaining agreement the Board

would be bound by that determination and thus pre-

cluded from finding any unfair labor practice based

on failure to meet obligations under the rejected

agreement in the post-petition period (ibid.).

REASONS FOR GRANTING THE PETITION

This case raises significant and recurring questions

concerning accommodation of the policies underlying

two statutory schemes—the National Labor Relations

Act and the Bankruptcy Code. The decision of the

court of appeals acknowledgedly conflicts with deci-

sions of the Second Circuit regarding the showing

that must be made by a debtor-in-possession in order

to justify rejection of a collective bargaining agree-

ment during Chapter 11 reorganization proceedings.

The standard for rejection fashioned by the court of

appeals in this case gives insufficient weight to the

important statutory policy in favor of collective bar-

gaining. In addition, the court of appeals’ holding

that the Board is precluded from finding an unfair

labor practice based on a debtor-in-possession’s uni-

lateral alteration of the terms of a collective bargain-

ing agreement during the period between filing of a

Chapter 11 petition and court approval of rejection

of the agreement seriously and improperly interferes

with the Board’s enforcement of the NLRA. The re-

cent dramatic increase in bankruptcy filings makes

resolution of these questions particularly important.

Review by this Court is therefore warranted.

1. a. Rejection of a collective bargaining agreement

by a debtor-in-possession during reorganization pro-

ceedings involves a confrontation between the statu-

tory policies of the National Labor Relations Act and

those of the Bankruptcy Code. See App. A, infra,

7a. Section 8(a)(5) of the NLRA, 29 U.S.C.

158(a) (5), makes it an unfair labor practice for an

employer, including a trustee in reorganization pro-

ceedings,‘ to refuse to bargain collectively with the

representatives of his employees. Section 8(d), 29

U.S.C. 158 (d), defines the duty to bargam collec-

tively to mean, inter alia, that no party to a collective

bargaining agreement shall “terminate or modify it“

Section 2(1) of the NLRA, 29 U.S.C. (Supp. IV) 152(1),

provides that the term “person” includes trustees in cases

under Title 11; Section 2(2) of the Act, 29 U.S.C. 152(2),

provides that the term “employer” includes any person acting

as an agent of an employer, directly or indirectly.

unless that party follows specified procedures.“ Under

these provisions, it is a violation of the Act for a

party unilaterally to modify or abrogate a collective

bargaining agreement. These provisions embody a

central purpose of the labor laws: “the promotion

of collective bargaining as a method of defusing and

channeling conflict between labor and management.”

First National Maintenance Corp. v. NLRB, 452 U.S.

666, 674 (1981).

On the other hand, Section 365(a) of the Bank-

ruptey Code, 11 U.S.C. (Supp. V) 365(a), provides

that a debtor-in-possession may reject executory con-

tracts upon approval by the bankruptcy court.“ The

mechanism of rejection serves an underlying purpose

of the bankruptcy laws, since rejection of burdensome

The required procedures under Section 8 (d) include notice

to the other party to the agreement and to the Federal Media-

tion and Conciliation Service, an offer to negotiate a new

agreement, and continuation of the agreement for a 60-day

period following notice of termination or modification, or until

the expiration date of the contract, whichever occurs later.

These conditions for modification or termination are designed

to “facilitate agreement in place of economic warfare.” Allied

Chemical Workers, Local Union No. 1 v. Pittsburgh Plate

Glass Co., 404 U.S. 157, 187 (1971). However, Section 8(d)

permits a party to a collective bargaining agreement wit! a

fixed expiration date to refuse to discuss or agree to any

modification of the agreement during its term. See Oak Cliff-

Golman Baking Co., 207 N.L.R.B. 1063 (1973), enforced, 90

L.R.R.M. (BNA) 2615 (5th Cir. 1974) ; C&S Industries, 158

N.L.R.B. 454, 456-458 (1966).

*Section 365(a) provides in pertinent part that “the

trustee, subject to the court’s approval, may assume or re-

ject any executory contract * * *.” Since a debtor-in-possession

may exercise the powers of a trustee, 11 U.S.C. (Supp. V)

1107, it may apply for permission to reject executory con-

tracts.

obligations may help a company to return to financial

viability. Nothing in the Bankruptcy Code or its his-

tory expressly excludes collective bargaining agree-

ments from the class of executory contracts that may

be rejected. Section 313(1) of the Bankruptcy Act,

11 U.S.C. 713(1), which also provided for court ap-

proval of rejection of executory contracts in reor-

ganization proceedings, likewise did not indicate how

collective bargaining agreements were to be treated.

Thus, courts have been faced with the need to find a

satisfactory resolution of “the tension between the

{bankruptcy statute’s] policy in favor of giving the

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

couraging enforcement of collective bargaining agree-

ments * * *.” Brotherhood of Railway Employees v.

REA Express, Inc., 523 F.2d 164, 167 (2d Cir.),

cert. denied, 423 U.S. 1017 (1975).

b. The Second Circuit led the way in fashioning

an accommodation between the NLRA, on the one

hand, and Section 313(1) of the old Bankruptcy Act,

11 U.S.C. 713(1) (the predecessor of Section 365 of

the Bankruptcy Code), on the other. In Shopmen’s

Local Union No. 455 v. Kevin Steel Products, Inc.,

519 F.2d 698 (2d Cir. 1975), the court held that col-

lective bargaining agreements constituted executory

contracts within the meaning of Section 313(1).’ It

The court found no indication that Congress had meant to

exclude collective bargaining agreements from the broad lan-

guage of Section 313(1). 519 F.2d at 704-705. It noted that,

when Congress wished to remove labor agreements from the

scope of a general power to reject executory contracts, it

knew how to do so, citing Section 77(n) of the Bankruptcy

Act, 11 U.S.C. 206 (n), which specifically prohibited a bank-

ruptey court or trustee from changing wages or working

conditions of railroad employees except in the manner pre-

scribed by the Railway Labor Act. 519 F.2d at 704-705.

concluded also that Section 8(d) of the NLRA did

not preclude a bankruptcy court from allowing rejec-

tion of a collective bargaining agreement.* However,

the court held that a proper accommodation of the

interests served by the labor laws required that in the

case of collective bargaining agreements bankruptcy

courts should use a standard different from the “busi-

ness judgment” test normally applied to determine

whether an executory contract should be rejected. The

court concluded that the decision whether to allow

rejection of labor agreements should not be based

solely on whether rejection would improve the finan-

cial status of the debtor, because such a “narrow ap-

proach totaliy ignores the policies of the Labor Act

and makes no attempt to accommodate to them”

(519 F.2d at 707). Rather, a bankruptcy court

should permit rejection of a collective bargaining

agreement “only after thorough scrutiny, and a care-

ful balancing of the equities on both sides, for, in

relieving a debtor of its obligations under a collective

bargaining agreement, it may be depriving the em-

ployees of their seniority, welfare and pension rights,

as well as other valuable benefits which are incapable

The court stated that the debtor-in-possession was not the

same entity as the pre-bankruptcy company, but was a new

entity with its own rights and duties subject to the supervi-

sion of the bankruptcy court (519 F.2d at 704). The court

believed that the debtor-in-possession should not be required

to assume an outstanding labor agreement, since this would

place it in a worse position than a successor employer, which

generally is not bound by an existing labor agreement (ibid.).

In the court’s view, “[u]ntil the debtor here assumes the old

agreement or makes a new one, it is not a ‘party’ under sec-

tion 8(d) to any labor agreement with the union and is simply

not subject to the termination restrictions of the section”

(ibid.)

of forming the basis of a provable claim for money

damages” (ibid., quoting In re Overseas National Air-

ways, Inc., 238 F. Supp. 359, 361-362 (E.D.N.Y.

1965) ).

Approximately a month after its decision in Kevin

Steel, the Second Circuit expanded on the test to be

applied to rejection of collective bargaining agree-

ments. In Brotherhood of Railway Employees v. REA

Express, supra, the court extended the principles

stated in Kevin Steel to agreements under the Rail-

way Labor Act. In restating the Kevin Steel test for

whether rejection of a collective bargaining agree-

ment should be authorized, the court stated that in

view of the serious effects rejection has on employees,

it should be permitted only where it clearly appears

to be the lesser of two evils and that, unless the agree-

ment is rejected, the [company] will collapse and the

employees will no longer have their jobs” (523 F.2d

at 172).

The Kevin Steel/REA Express standard articu-

lated by the Second Circuit has been accepted and ap-

plied by a number of bankruptcy and district courts.’

*See In re Miles Machinery, No. 81-00388 (Bankr. E. D.

Mich. June 17, 1982), slip op. 4-5 (rejection disallowed) ; In

re David A. Rosow, Inc., 106 L.R.R.M. (BNA) 2842, 2843-

2844 (Bankr. D. Conn. 1981) (same); In re Connecticut

Celery Co., 106 L.R.R.M. (BNA) 2847, 2851-2853 (Bankr. D.

Conn. 1980) (same); In re Studio Fight Lighting, Inc., 91

L.R.R.M. (BNA) 2429, 2480 (E.D.N.Y. 1976) (same). Com-

pare In re Brada Miller Freight System, Inc., 16 Bankr. 1002,

(N.D. Ala. 1981), appeal docketed, No. 82-7043 (11th Cir. filed

Jan. 28, 1982) (rejection allowed); In re Allied Technology,

Inc., 8 Bankr. 366 (Bankr. S. D. Ohio 1980) (rejection allowed

when business had ceased operating and generating revenue) ;

In re Alan Wood Steel Co., 449 F. Supp. 165, 169-170 (E.D.

Pa. 1978) (same); In re Penn Fruit Co., 92 L. R. R. M. (BNA)

3548 (E. D. Pa. 1976) (rejection allowed where no possibility

The standard generally has served as a predictable

guideline for employers involved in reorganization

proceedings, their employees, and the Board.

ce. The Third Circuit here expressly rejected a

crucial aspect of the Second Circuit standard for re-

jection of collective bargaining agreements. Under

the decision below a debtor-in-possession need not

make a threshold showing that the company is likely

to go out of business unless a collective bargaining

agreement is rejected. The failure to require such a

showing is erroneous.

Under the old Bankruptcy Act, the courts generally

required debtors-in-possession to make the threshold

showing. Congress presumably was aware of this

judicial interpretation at the time it enacted the new

Bankruptcy Code in 1978, see Lorillard v. Pons, 434

U.S. 575, 581 (1978), but gave no indication that it

intended to overrule it. Congressional reenactment of

the provision without substantial change strongly sug-

gests an intent to adopt the consistent judicial inter-

pretation of that provision. See, e.g., Cannon v. Uni-

versity of Chicago, 441 U.S. 677, 696-698 (1979);

Lorillard v. Pons, supra, 434 U.S. at 580; NLRB v.

Gullett Gin Co., 340 U.S. 361, 366 (1951).

The threshold showing required under the Kevin

Steel/REA Express standard is necessary in order to

afford adequate recognition to the important statu-

existed of saving jobs of employees). Until the Third Cir-

cuit’s decision in this case, no other court of appeals had spe-

cifically addressed the proper standard for rejection of a labor

contract. Cf. Local Joint Executive Board v. Hotel Circle,

Inc., 613 F.2d 210, 218-214 n.2 (9th Cir. 1980) (finding it

unnecessary to address the question whether the bankruptcy

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“).

tory interest in collective bargaining. As this Court

has recognized, there is a strong public interest in

collective bargaining, and collective bargaining agree-

ments occupy a special status. It is fundamental that

“a collective bargaining agreement is not an ordinary

contract.” John Wiley d Sons, Inc. v. Livingston, 376

U.S. 543, 550 (1964). See, generally, Cox, Rights

Under a Labor Agreement, 69 Harv. L. Rev. 601

(1956). Rather, “it is a generalized code to govern

* * * the whole employment relationship. It calls into

being a new common law—the common law of a par-

ticular industry or of a particular plant.” United

Steelworkers v. Warrior d Gulf Navigation Co., 363

U.S. 574, 578-579 (1960) (footnote omitted). The

special status of collective bargaining agreements un-

der our national labor policy argues in favor of a

stringent standard governing rejection of such agree-

ments.

Application of a strict standard for rejection of

collective bargaining agreements is especially impor-

tant because of the impact of rejection on employees.

A collective bargaining agreement normally provides

employees with many nonmonetary rights, such as

seniority, grievance and arbitration procedures, and

no strike/no lockout clauses; these rights, as well as

any monetary benefits, are wiped out when the agree-

ment is rejected. The availability of a claim for mon-

etary damages for breach of the agreement is clearly

inadequate to compensate employees for loss of these

rights. See Kevin Steel, supra, 519 F.2d at 707. Even

the monetary terms of the agreement, such as wages

and benefits, stand on a different footing from the

claims of commercial creditors whose contracts have

been rejected. While such creditors generally spread

risk among numerous customers, employees are wholly

dependent on their employer for wages and benefits.

The predicament of employees is especially difficult

during periods of financial recession, when bank-

ruptcies are most likely to occur.

The statutory policy in favor of collective bargain-

ing requires that rejection of a collective bargaining

agreement be a last resort, not a routine matter. If

debtors-in-possession were not required to show that

a business will fail unless rejection of a labor contract

is permitted, such rejection would become much more

frequent. Debtors-in-possession are understandably

eager to shed what they may regard as troublesome

obligations under a labor contract. However, a proper

accommodation of the policies underlying the labor

laws requires that rejection of collective bargaining

agreement obligations not occur unless it is essential

to survival of the company.”

The acknowledged conflict between the Second and

Third Circuits regarding the proper accommodation

of the labor and bankruptcy laws creates uncertainty

% The reasons offered by the court below for rejecting the

Kevin Steel/REA Express test do not withstand scrutiny. The

court observed first that it may be impossible to predict the

success of a reorganization until late in the proceedings (App.

A, infra, 14a). That criticism misses the point: until it is ap-

parent that the business is likely to fail unless the collective

bargaining agreement is rejected, a proper accommodation of

the policies underlying the labor laws requires that the terms

previously bargained for remain in effect. The court also

expressed concern that the Kevin Steel/REA Express stan-

dard “would make it likely that numerous businesses attempt-

ing to reorganize will in fact be forced over the line into

liquidation” (App. A, infra, 14a-15a). The court cites no

examples of such an occurrence, and its concern appears to be

groundless. If at any point during the reorganization pro-

ceedings a debtor-in-possession can show that it is likely to be

forced into liquidation, it can then seek rejection of the col-

lective bargaining agreement.

and thus is likely to stimulate considerable litigation

in bankruptcy courts around the country. The con-

flict also prevents adr... stration of a uniform stan-

dard for protection of collective bargaining interests;

thus, union members whose employers file for reor-

ganization in the Third Circuit will be afforded much

less protection than members of the very same union

whose employers file for reorganization in the neigh-

boring Second Circuit. For example, application of

the Second Circuit standard in the present case would

have resulted in dismissal] of the motion for rejection,

since Bildisco’s evidence was clearly insufficient to

establish that the business would fail if the agree

ment were not rejected. Absent a resolution of the

conflict, employers, employees, and the Board will be

unable to look to a single standard governing protec-

tion of rights under a collective bargaining agree-

ment during reorganization proceedings. In light of

the high number of such proceedings currently pend-

ing, resolution of the conflict is a matter of consid-

erable importance.

d. In several other respects the standard adopted

by the court below gives considerably less weight to

collective bargaining interests than the Second Cir-

cuit standard. The court below established a test

(App. A, infra, 17a) under which the debtor-in-

possession first must show that an agreement is bur-

densome to the estate and the bankruptcy court then

must balance the equities, with particular attention

to establishing equity between the employees and the

11 The single witness for Bildisco testified only that credi-

tors were concerned about the “union situation” at Bildisco,

that Bildisco could save $100,000 in 1981 if it operated non-

union, and that would make a “considerable difference”

in Bildisco’s potential profit for 198: (App. A, infra, 8a;

C.A. App. 36a, 41a).

creditors. In addition, the bankruptcy court must

make a reasoned determination that rejection of the

agreement will assist the debtor-in-possession to

achieve a satisfactory reorganization (ibid.). Under

this standard it seems likely that the majority of col-

lective bargaining agreements could be rejected. Pre-

sumably most debtors-in-possession could establish that

a labor contract imposed some financial burden on the

estate and deprived it of assets that could be used for

other purposes. In addition, under the balancing of

equities no special weight is to be given to collective

bargaining interests; instead, interests of creditors

are to be weighed equally with interests of employees.

Presumably a court could always conclude that since

creditors are compromising during reorganization,

employees, too, should sacrifice.” Finally, rejection of

contractual obligations to employees presumably could

be said to assist in achieving a satisfactory reorgani-

The court of appeals indicated (App. A, infra, 16a) that

one factor to be weighed in a balancing of the equities is the

fact that employees could file a claim against the estate for

damages resulting from rejection of a collective bargaining

agreement. As suggested above, such a claim would provide

no compensation for loss of the numerous nonmonetary

rights to which employees are entitled under most collective

bargaining agreements. For example, the agreement in this

case included provisions relating to duties of employees, sen-

iority, arbitration of disputes, leave, vacations, and many

other aspects of the employer-employee relationship. See C.A.

App. 2a-29a. In addition, recovery of any monetary claims is

an uncertain proposition, since claims based on rejection are

classified as pre-petition claims (see 11 U.S.C. (Supp. V)

365 (g) (1)) and are thus part of the class of general unsecured

claims. Thus, employees may have little chance of recovering

compensation for their lost contractual rights. It is therefore

improper to consider this factor as weighing in favor of

rejection in a balancing of the equities.

zation in many cases. We submit, however, that such

a standard gives insufficient weight to the special

status of collective bargaining agreements under the

NLRA and to the special hardships imposed on em-

ployees as a result of rejection.

The Third Circuit test also gives insufficient con-

sideration to Congress’ decision that the relationship

between labor and management should be resolved

through the collective bargaining process. The court

below made no reference to the possibility that the

bankruptcy court, before entertaining a petition to

reject the existing agreement, could require the debtor-

in-possession to attempt to reach a new agreement

with the union that would preserve rights of employ-

ees to the maximum extent possible, while easing

some of the financial pressure on the estate.” In-

stead, the court’s test allows the bankruptcy court to

usurp the parties’ roles in the collective bargaining

process and to decide for itself such questions as

whether “it would be in the interests of the workers

in a bargaining unit to be afforded the opportunity

to continue to work under less generous financial

benefits than to insist upon an absolute payment of

vacation benefits, pension, health and welfare bene-

fits, and wage increases” (App. A, infra, 18a n.13);

One court has suggested that there should be a threshold

requirement that the debtor-in-possession attempt to renegoti-

ate the collective bargaining agreement before a rejection

application may be made to the bankruptcy court. In re Price

Chopper Supermarkets, Inc., 19 Bankr. 462, 466 (Bankr. S.D.

Cal. 1982). And see Note, The Labor-Bankruptcy Conflict:

Rejection of a Debtor's Collective Bargaining Agreement, 80

Mich. L. Rev. 184, 149-152 (1981), suggesting the same re-

quirement. The record in this case suggests that the debtor-in-

possession made no attempt whatsoever to renegotiate the

collective bargaining agreement it sought to reject.

and whether the employees are likely to strike if the

contract is rejected (id. at 16a)."* Of course, these

normally are matters that are best worked out by the

parties themselves; given the mutual interest of em-

ployer and employees in preservation of the business,

it would be most unusual for employees to insist on

continuation of particular terms if the debtor-in-

possession could demonstrate during negotiations that

adherence to those terms would cause the business to

fail. A proper accommodation of the statutory labor

policy appears to require that, even if rejection might

be warranted, the debtor-in-possession first must seek

to bargain in an effort to reach a mutually satisfac-

tory solution.“

The practice of bankruptcy judges of participating in the

affairs of the debtor’s estate, including negotiation of con-

tracts, was one of the problems that the Bankruptcy Code

was designed to avoid. See H.R. Rep. No. 95-595, 95th Cong.,

lst Sess. 88-91 (1977). The Third Circuit’s standard for

rejection defeats the congressional purpose by unnecessarily

injecting bankruptcy judges into the arena of collective

bargaining

„Although the court of appeals remanded so that the bank-

court could apply the standard it had fashioned, the

case is now ripe for review. The court of appeals’ ruling “is

fundamental to the further conduct of the case” (United

States v. General Motors Corp., 323 U.S. 878, 877 (1945)),

and the conflict between the circuits involves a fundamental“

issue. Hanover Star Milling Co. v. Metcalf, 240 U.S. 4038,

408-409 (1916). The basic issue on which the Second and

Third Circuits are divided—whether a debtor-in-possession

must make a threshold showing that the business will fail if

reje tion of a collective bargaining agreement is not allowed

may be dispositive of the outcome of this case, since, if the

Second Circuit test is applied, Bildisco’s showing was clearly

insufficient to justify rejection of the agreement, and its mo-

2. The court below also held (App. A, infra, 20a-

26a) that if the bankruptcy court on remand author-

ized rejection the Board would be precluded from find-

ing an unfair labor practice on the basis of Bildisco’s

conduct in the period following the filing of the Chap-

ter 11 petition. This ruling is incorrect and seriously

undermines the Board’s ability to protect the collec-

tive bargaining rights of employees during reorgani-

zation proceedings, thus depriving employees of im-

portant protection at a time when they are particu-

larly vulnerable.

The court of appeals rested its holding primarily

on its conclusion that the bankruptcy court had per-

mitted rejection of the collective bargaining agree-

ment retroactive to the date immediately preceding

the date Bildisco filed its Chapter 11 petition (see

App. A, infra, 24a-25a). In fact, neither the bank-

ruptcy court’s order nor the district court’s order (see

Apps. E and F, infra, 49a-50a) indicates that the re-

jection was to be retroactive or refers to an effec-

tive date for the rejection.“ The court of appeals

(App. A, infra, 4a, 24a) cited 11 U.S.C. (Supp. V)

tion should have been dismissed. Moreover, prompt resolution

of this issue could avoid uncertainty and unnecessary litiga-

tion in other cases, as well as a drain on the assets of Bildisco.

If the Third Circuit’s test were applied, the parties would be

required to present evideu.ce on a variety of matters which,

under the Second Circuit standard, either would be irrelevant

or would not be reached unless the threshold showing had

been made. It is important not only to the parties directly

affected by business failures, but also to the efficient adminis-

tration of the labor and bankruptcy laws, that the standard

for rejection of collective bargaining agreements be uniform

and clearly defined.

% Bildisco’s motion requesting approval of rejection (C. A.

App. 1a) also did not specify any effective date.

365 (g) (1), which provides that rejection of an execu-

tory contract constitutes a breach of the contract “im-

mediately before the date of the filing of the peti-

tion.“ However, that section refers only to the pri-

ority of claims for damages based on rejection of the

contract, not to existence of the contract in the post-

petition period.“

It is weli established that contractual obligations

of a debtor continue to exist in the period follow-

ing the filing of a reorganization petition. See,

e.g., Truck Drivers Local Union No. 807 v. Bohack

Corp., 541 F.2d 312, 321 n.15 (2d Cir. 1976):

“If the contract is rejected by the bankruptcy court,

it will be deemed to have been breached as of the

date of filing of the petition under Ch. XI. But

like any other unilateral breach of contract, it does

not destroy the contract * * *.”™” A _ debtor-in-

* See also 11 U.S.C. (Supp. V) 502 (g), which states that a

claim arising from rejection of an executory contract shall be

determined “the same as if such claim had arisen before the

date of the filing of the petition.”

18 The legislative history confirms that Congress included

Section 365 (g) (1) to ensure that claims based on rejection

of executory contracts would be treated as pre-petition claims,

i. e., that they would have the status of general unsecured

claims. See H.R. Rep. No. 95-595, 95th Cong., Ist Sess. 349

(1977) ; S. Rep. No. 95-989, 95th Cong., 2d Sess. 60 (1978).

A similar rule applied to claims based on rejection of execu-

tory contracts under the old Bankruptcy Act. See 14 Collier

on Bankruptcy J 11-58.04[4], at 11-58-16 (J. Moore & L. King

14th ed. 1976).

1 See also In re W. T. Grant Co., 620 F.2d 319, 321 (2d

Cir.), cert. denied, 446 U.S. 983 (1980) ; In re Unishops, Inc.,

558 F.2d 305, 308 (2d Cir. 1977); In re Alfar Dairy, Inc.,

458 F.2d 1258, 1261 (5th Cir.), cert. denied, 409 U.S. 1048

(1972) ; 2 Collier on Bankruptcy 7 365.08, at 865-22 (L. King

15th ed. 1982).

possession is not free to ignore its obligations under

a collective bargaining agreement simply because it

has filed a Chapter 11 petition; nor will court ap-

proval of rejection at some later point relieve the

estate of liability for an earlier breach of the agree-

ment.” Likewise, there is no reason why the Board

may not find unilateral alteration of the terms of the

agreement during the post-petition period to consti-

tute an unfair labor practice. The Board’s order in

such a case is one “designed to vindicate the public

policy of the statute by making the employees whole

for losses suffered on account of an unfair labor prac-

tice.” See Nathanson v. NLRB, 344 U.S. 25, 27

(1952). The refusal of the court of appeals to enforce

the Board’s order in this case frustrates that statu-

tory policy.

The court of appeals also suggested that no unfair

labor practice could have been found because the

debtor-in-possession was a new entity and thus was

not a party to the agreement, citing the Second Cir-

cuit’s opinion in Kevin Steel (see App. A, infra, 21a-

22a). However, the Second Circuit itself has warned

that the “new entity” concept advanced in Kevin

Steel cannot be carried too far. In Truck Drivers

Local Union No. 807 v. Bohack Corp., swpra, 541 F.2d

at 320, the court cautioned that “the statement that

the debtor is not a ‘party,’ and the analogy to the

successor employer, cannot be taken literally, since

neither affirmance nor rejection of the collective bar-

gaining agreement would be possible by one not a

The court of appeals apparently recognized that the em-

ployees could assert claims based on Bildisco’s failure to meet

its contractual obligations in the post-petition period. See

App. A, infra, 16a.

party to it.“ The court in Bohack Corp. stressed

that the bankruptcy laws did not authorize a debtor-

in-possession to ignore its obligations under the

NLRA (ibid.). See also Kevin Steel, swpra, 519 F.2d

at 706; App. A, infra, 16a. Here Bildisco committed

an unfair labor practice by unilaterally altering the

terms of the collective bargaining agreement in the

post-petition period. The subsequent rejection of the

agreement did not wipe out that unfair labor prac-

tice, and the Board therefore should not have been

precluded from issuing an order.

The court of appeals’ conclusion that rejection op-

erates to wipe out the existence of a collective bar-

gaining agreement in the period subsequent to filing

of the petition places employees in a wholly unten-

able position. Most employees have only their own

time and skills as a source of livelihood. Ordinarily

they have the option of seeking alternative employ-

ment if they are unwilling to provide services under

existing contractual terms. If rejection can operate

to nullify those terms retroactively, employees will

lose benefits for a period during which they believed

themselves contractually entitied to receive them. At

the same time, debtors-in-possession will be encour-

aged to disregard contractual obligations long before

21 The “new entity” concept articulated in Kevin Steel has

not been accepted by the Board (see page 6, supra) and has

been criticized by commentators. See, e.g., Note, Bankruptcy

and the Rejection of Collective Bargaining Agreements, 51

Notre Dame Law. 819, 829-830 (1976); Note, Bankruptcy

Law—Labor Law—Rejection of Collective Bargaining Agree-

ments as Executory Contracts in Bankruptcy, 22 Wayne L.

Rev. 165, 172-173 (1975) (“it is difficult to see how a debtor-

in-possession can be truly distinct from its former self“)

it becomes clear that they will be entitled to reject an

agreement. Moreover, the expectation that rejection

will be retroactive removes an important incentive for

the debtor-in-possession to negotiate with the union to

obtain a modification of the agreement that will pre-

serve some employee rights before taking the drastic

step of repudiating it. Finally, the court of appeals’

holding seriously impairs the Board’s unique ability

to protect the collective bargaining interests of em-

ployees during reorganization proceedings by issuing

orders directed at unfair labor practices. Such orders

can operate to deter unilateral alterations in the

terms of a collective bargaining agreement and also

to aid employees in recovering compensation for bene-

fits due under the agreement.” In a period of in-

creasing bankruptcies, it is particularly important

that the Board not be precluded from exercising its

statutory responsibilities. In view of the serious

practical consequences of the court of appeals’ deci-

sion, review by the Court is warranted.

22 A Board claim for payment of wages and other benefits

owing for the period of Chapter 11 operations is a claim for

costs of administration and thus would receive priority in

payment from the estate. See Jn re Bel Air Chateau Hospital,

Inc., 106 L.R.R.M. (BNA) 2834 (C.D. Cal. 1980). In con-

trast, claims based on rejection of an executory contract are

treated as pre-petition claims under 11 U.S.C. (Supp. V)

365 (g) (1) and thus join the class of general unsecured claims.

Filing of a Board claim on behalf of a group of employees is

an efficient way to obtain recovery of payments that other-

wise may be too small to warrant filings on an individual

basis.

CONCLUSION

The petition for a writ of certiorari should be

granted.

Respectfully submitted.

Rex E. LEE

Solicitor General

LAWRENCE G. WALLACE

Deputy Solicitor General

CAROLYN F. CORWIN

Assistant to the Solicitor General

WILLIAM A. LUBBERS

General Counsel

JOHN E. HIGGINS, JR.

Deputy General Counsel

ROBERT E. ALLEN

Associate General Counsel

NoRTON J. COME

Deputy Associate General Counsel

LINDA SHER

Assistant General Counsel

JAMES Y. CALLEAR

Attorney

National Labor Relations Board

NOVEMBER 1982

APPENDIX A

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

Nos. 81-2149 and 81-2238

IN RE: BILDIsco, A General Partnership of

the State of New Jersey,

LOCAL 408, INTERNATIONAL BROTHERHOOD

OF TEAMSTERS, CHAUFFEURS, WAREHOUSEMEN

AND HELPERS OF AMERICA, APPELLANT, No. 81-2140

NATIONAL LABOR RELATIONS BOARD, INTERVENOR

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF NEW JERSEY

(D.C. Civil No. 81-0513)

NATIONAL LABOR RELATIONS BOARD,

PETITIONER, No. 81-2238

BILDISCO AND BILD ISco,

DEBTOR-IN-POSSESSION, RESPONDENT

LOCAL 408, INTERNATIONAL BROTHERHOOD OF

TEAMSTERS, CHAUFFEURS, WAREHOUSEMEN

AND HELPERS OF AMERICA, INTERVENOR

National Labor Relations Board

Application for Enforcement

Argued March 19, 1982

Before: ALDISERT, VAN DUSEN, and GARTH

Circuit Judges

(Filed June 17, 1982)

OPINION OF THE COURT

ALDISERT, Circuit Judge.

In these consolidated proceedings we are required

to accommodate the tension between two important

aspects of our national policy, represented by the

National Labor Relations Act and the Bankruptcy

Reform Act of 1978. Specifically, we must decide

whether the bankruptcy court erred in permitting a

debtor-in-possession to reject a collective bargaining

agreement as an executory contract. We also must

consider the National Labor Relations Board’s appli-

cation for enforcement of its order determining that

the same debtor-in-possession committed an unfair

labor practice by unilaterally changing the terms of

the agreement. We vacate the judgment in the ap-

peal at No. 81-2140 and remand for further proceed-

ings. Because the NLRB both erred in its choice

and application of legal precepts and ahused its dis-

cretion, however, we deny the application for en-

forcement at No. 81-2238.

Bildisco, a New Jersey partnership engaged in

selling and distributing building supplies, filed a

voluntary petition for reorganization on April 14,

1980, under Chapter 11 of the Bankruptcy Code.

The bankruptcy court thereafter designated the part-

nership as a debtor-in-possession and authorized it

to operate the business under 11 U.S.C. § 1107.

1 A debtor-in-possession is the debtor, 11 U.S.C. § 1101(1),

who is given many additional rights, powers, and duties to

the estate, as set forth generally in § 1107:

(a) Subject to any limitations on a trustee under this

chapter, and to such limitations or conditions as the court

prescribes, a debtor in possession shall have all the rights,

Bildisco and Local 408 of the Teamsters Union were

parties to a collective bargaining agreement that on

the date of the petition covered eighteen of Bildisco’s

employees. On January 5, 1981, the debtor-in-

possession sought bankruptcy court permission to

reject the collective bargaining agreement under 11

U.S.C. § 365 (a), which permits rejection of execu-

tory contracts upon bankruptcy court approval. The

sole witness at the hearing on the motion was one of

Bildisco's partners, Sal Valente, who testified that

Bildisco's creditors were concerned about the “union

situation” and that by operating without the collec-

tive bargaining agreement Bildisco would be able to

save approximately $100,000 in 1981. Although

eighteen of Bildisco’s employees were covered by the

collective bargaining agreement as of the date of

the petition, by the date of the hearing the number

had been reduced to three.“ The union cross-

examined alente, but it did not offer any other evi-

dence concerning the effect of rejection on Bildisco’s

employees.

The bankruptcy judge, without expressly articulat-

ing the standard that he applied,* granted permis-

other than the right tc compensation under section 330 of

this title, and powers, and shall perform all the functions

and duties, except the duties specified in sections 1106

(a) (2), (3), and (4) of this title, of a trustee serving in

a case under this chapter.

Valente estimated that Bildisco would be increasing the

number of employees to ten as the off-season ended, and his

projections of the savings that would be realized if the agree-

ment were rejected are predicated on the costs of salaries and

benefits to ten employees.

The bankruptcy judge concluded his consideration of the

standard to be applied as follows:

sion to reject on January 15, 1981, retroactive to the

date immediately preceding the date of the petition.

See 11 U.S.C. § 365 (g) (1). The union appealed to

the district court, which on May 4, 1981, issued a

bench opinion affirming the order of the bankruptcy

court. Noting that the bankruptcy judge had not

identified the test he had used, the district court held

that the permission to reject was proper in any event.

In the meantime, the union had filed unfair labor

practices charges with the NLRB complaining that

Bildisco had refused to grant certain wage increases,

to pay pension and welfare contributions, or to turn

over union dues, all in violation of the collective bar-

gaining agreement. After investigating the charges,

I don’t know under the Code what power the court has

to disapprove an application to reject a contract, unless

it can be shown it was a promiscuous act on the part of

the debtor, and it was really a beneficial contract.

It is surely not a beneficial contract if it costs him $132

a week, which is my own computation, more than he

would have to pay if he didn’t have the contract.

Under the circumstances I am going to have to allow

the motion of the debtor.

App. at 62-63. Subsequently, the following dialogue took

place:

COUNSEL FOR THE UNION: Just for the record,

your Honor, with respect to the ruling today, it is your

position, your Honor—and correct me if I am wrong

the cases prior to the enactment of the Bankruptcy Code,

those cases dealing with special considerations given

collective bargaining are no longer applicable?

THE COURT: All I am saying is this is not a case

under the Bankruptcy Act; it is under the Bankruptcy

Code.

Under Section 365 I have to grant the motion to reject.

App. at 64-65.

the General Counsel of the NLRB issued a complaint

on July 31, 1980, alleging that Bildisco, and Bildisco

as debtor-in-possession, had engaged in unfair labor

practices in violation of sections 8 (a) (1) and (5)

of the National Labor Relations Act by making uni-

lateral changes in the collective bargaining agree-

ment. The complaint advised Bildisco that a hearing

had been scheduled for March 9, 1981, more than

seven months later, and that if Bildisco did not

answer the complaint within ten days of service, all

of the allegations would be deemed admitted. On

September 24, 1980, a Board agent advised Valente

of the company’s obligation to answer the complaint.

On October 8, the General Counsel issued an amended

complaint reflecting additional union allegations that

the company had failed to pay vacation benefits to

its employees. On October 27, 1980, a Board attorney

informed Valente by telephone and by letter that he

would seek summary judgment if no answer to the

amended complaint were received by October 31. No

answer was filed.

On January 27, 1981, twelve days after the bank-

ruptey court authorized rejection of the collective

bargaining agreement, the Board’s General Counsel

moved for summary judgment based on Bildisco’s

failure to answer the amended complaint. Two days

later Bildisco responded with a request for a 60-day

stay of proceedings so that it could apply for bank-

ruptcy court permission to retain special labor coun-

sel. The General Counsel opposed this request.

On February 9, 1981, the Board issued a notice to

show cause why summary judgment should not be

granted. Bildisco responded on February 20 that its

delay in filing an answer was caused by the disrup-

tion of Chapter 11 proceedings and that it had not

yet received bankruptcy court permission te retain

special labor counsel.‘ It also informed the Board

that the bankruptcy court had granted its motion for

permission to reject the collective bargaining agree-

ment. Noting the retroactive effect of the rejection,

the debtor-in-possession argued that no contract

existed between it and the union after April 14, 1980.

It argued also that any unpaid contributions due

prior to the petition did not constitute unilateral

changes in the contract, but were claims subject to

allowance in Bildisco’s Chapter 11 proceeding.

On April 23, 1981, stating that Bildisco had not

shown good cause for failing to file a timely answer,

the Board granted the General Counsel’s motion for

summary judgment, notwithstanding its notification

two months earlier that the bankruptcy court had

permitted Bildisco to reject the agreement. The

order, addressed to “Bildisco and Bildisco, debtor-

in-possession,” required Bildisco to make all the de-

linquent contributions and payments plus interest,

to honor the terms of the collective bargaining agree-

ment, and to post appropriate notices. The NLRB

made a “finding of fact” that the debtor-in-possession

“is, and has been at all times material herein since

April 17, 1980, an alter ego in bankruptcy to Bil-

disco.” App. at 131.“ The Board subsequently ap-

plied to this court for enforcement of its order.

We granted the Board’s motion to consolidate the

two cases. The Board has intervened in the union’s

appeal from the district court order, and the union

*The bankruptcy court granted Bildisco this permission

on April 16, 1981.

The respondent filed a motion for reconsideration accom-

panied by an answer to the Board’s complaint; the Board

rejected the motion because it was postmarked two days after

the deadline for such motions. See 29 C.F.R. § 192.48(d) (2).

has intervened in the Board’s application for en-

forcement. We will consider the appeal and the

application for enforcement in turn.

II.

The rejection of a collective bargaining agreement

under the new Bankruptey Code, which implicates a

significant confrontation of labor and bankruptcy

policies, is a matter of first impression in the courts

of appeals. Nevertheless, we have the benefit of both

statutory direction and the decisions of other courts

interpreting the equivalent section of the former

Bankruptcy Act and the relevant provisions of the

NLRA.

Underlying Chapter 11 of the Code is a legislative

policy to provide opportunities for a debtor to reduce

or extend debts so that it can return to financial via-

bility.

The purpose of a business reorganization case,

unlike a liquidation case, is to restructure a busi-

ness’s finances so that it may continue to oper-

ate, provide its employees with jobs, pay its cred-

itors, and produce a return for its stockholders.

The premise of a business reorganization is that

assets that are used for production in the indus-

try for which they were designed are more valu-

able than those same assets sold for scrap. Often,

the return on assets that a business can produce

is inadequate to compensate those who have in-

vested in the business. Cash flow problems may

develop, and require creditors of the business,

both trade creditors and long-term lenders, to

wait for payment of their claims. If the business

can extend or reduce its debts, it often can be

returned to a viable state. It is more economi-

cally efficient to reorganize than to liquidate, be-

cause it preserves jobs and assets.

H.R. Rep. No. 595, 95th Cong., Ist Sess. 220 (1977),

reprinted in 1978 U.S. Code Cong. & Ad. News 5963,

6179. If a business can be turned around by reorgan-

ization, its creditors will recover more on their claims

than in a Chapter 7 liquidation,“ its employees will

keep their jobs, and the public will continue to bene-

fit from its production. Thus the debtor, its creditors

and employees, and the public at large benefit from

the business’ survival. Under the congressional

schema, this goal is promoted by numerous specific

mechanisms, including continued operation in the

hands of the debtor-in-possession or trustee, under

supervision of the court, with a “breathing spell“

free from the collections efforts of creditors. Another

mechanism is to allow the debtor-in-possession to re-

ject executory contracts that would burden the estate.

See 2 Collier on Bankruptcy / 365.01-03 (15th ed.

1981). See generally Group of Institutional Investors

v. Chicago, Milwaukee, St. Paul & Pacific R.R. Co.,

318 U.S. 523, 549-51 (1943); Sparhawk v. Yerkes,

Experience under the Bankruptcy Act demonstrated that

creditors received larger portions of their claims from reor-

ganization proceedings than from liquidations. According to

tabulations taken from a sample of bankruptcy cases, priority

creditors usually received full payment in a successful reor-

ganization but realized less than one-third of the amount of

their claims in a straight bankruptcy. Unsecured creditors

realized only a median nineteen percent under one-payment

plans and ten percent under deferred payment plans when

the debtor went through reorganization, but in straight bank-

ruptcies the median was only eight percent. D. Stanley &

M. Girth, Bankruptcy: Problem, Process, Reform 129-30,

142-48 (1971).

142 U.S. 1, 13 (1891); In re Italian Cook Oil Corp.,

190 F.2d 994 (3d Cir. 1951).

Section 365(a) of the Code provides, with excep-

tions not now relevant, that “the trustee, subject to

the court’s approval, may assume or reject any exec-

utory contract or unexpired lease of the debtor.” ’

Under Chapter 11 a debtor-in-possession has essen-

tially the same powers as a trustee, and it therefore

may reject executory contracts with the authorization

of the bankruptcy court.

This case places the statutory policies underlying

Chapter 11 in tension with our national labor policy,

as expressed in the National Labor Relations Act.

Broadly stated, that policy is to promote industrial

peace by facilitating collective bargaining. Sections

7 and 8 of the NLRA, 29 U.S.C. §§ 157 and 158,

guarantee the rights of workers to organize and to

bargain collectively and protect both employees and

employers from unfair labor practices that undermine

these rights.

The analogous provision of the Bankruptcy Act stated:

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

to the jurisdiction, powers, and duties conferred and im-

posed 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 interests as the court may desig-

Bankruptcy Act of 1898. § 813, 11 U.S.C. § 718 (1976)

(repealed).

11 U.S.C. § 1107. Under certain circumstances the court

may appoint a trustee to operate the business. 11 U.S.C.

§§ 1104, 1108.

10a

The snecific statute relied on by the union and the

Labor Board is § 8(d) of the NLRA, which provides

that no party to a collective bargaining agreement

may “terminate or modify” the agreement without

following a specified procedure.’ Our task is to rec-

oncile the apparent conflict between the NLRA and

the Bankruptcy Code ud the policies they represent.

III.

In enacting § 365, Congress provided no indication

that collective bargaining agreements were to be im-

mune from rejection and thus unique among execu-

tory contracts. Indeed, the few inferences of congres-

sional intent that may be gleaned from the Code and

Termination or modification of a collective bargaining

agreement is permitted by § 8(d) only if the moving party

(1) serves a written notice upon the other party to

the contract

(2) offers to meet and confer with the other party for

the purpose of negotiating a new contract or a contract

containing the proposed modifications ;

(8) notifies the Federal Mediation and Conciliation

Service and. . any State or Territorial agency estab-

lished to mediate and conciliate disputes within the State

or Territory

(4) continues in full force and effect, without resorting

to strike or lock-out, all the terms and conditions of the

existing contract for a period of sixty days after such

notice is given or until the expiration date of such con-

tract, whichever occurs later: [T]he duties so imposed

shall not be construed as requiring either party to discuss

or agree to any modification of the terms and conditions

contained in a contract for a fixed period, if such modifi-

cation is to become effective before such terms and condi-

tions can be reopened under the provisions of the contract.

29 U.S.C. § 158 (d).

lla

its legislative history are to the contrary. First, not-

withstanding several judicial decisions holding collec-

tive bargaining agreements susceptible to rejection,

Congress afforded collective bargaining agreements

no special treatment. Significantly, Congress did pro-

vide detailed provisions for acceptance of executory

contracts such as shopping center leases, § 365(b) (3),

and regarding transactions in commodities futures

contracts, §§ 765, 766. Moreover, one particular spe-

cies of collective bargaining agreement was singled

out:

Notwithstanding section 365 of this title, nei-

ther the court nor the trustee may change the

wages or working conditions of employees of the

debtor established by a collective bargaining

agreement that is subject to the Railway Labor

Act (45 U.S.C. 151 et seq.) except in accordance

with section 6 of such Act (45 U.S.C. 156).

11 U.S.C. § 1167. The sheer complexity of the Bank-

ruptey Reform Act might preclude our use of § 1167

as definitive proof that every other collective bargain-

ing agreement may be rejected, but the section per-

mits an inference that, with this one exception, Con-

gress did not intend to distinguish collective bargain-

ing agreements from executory contracts in general.

10 See, e.g., Truck Drivers Local Union No. 807 v. Bohack

Corp., 541 F.2d 312 (2d Cir. 1976) ; Brotherhood of Railway,

Airline and Steamship Clerks v. REA Express, Inc., 523 F.2d

164 (2d Cir.) , cert. denied, 423 U.S. 1017, 1078 (1975) ; Shop-

men’s Local Union No. 455 V. Kevin Steel Products, Inc., 519

F.2d 698 (2d Cir. 1975) ; Local Joint Executive Board, AFL-

CIO v. Hotel Circle, Inc., 419 F.Supp. 778 (S. D. Cal. 1976),

aff'd, 618 F.2d 210 (9th Cir. 1980).

124

IV.

Having determined that § 365 (a) authorizes the

bankruptcy court to permit the rejection of collective

bargaining agreements, we now turn to the standards

it should use in considering such a request. We begin

by rejecting the concept that the proceeding under

§ 8(d) of the NLRA is mandated. As more fully de-

veloped in Part VI-A, infra, a debtor-in-possession is

a new entity, separate and apart from the pre-

bankruptcy company, and does not become a party to

an executory contract unless it assumes the contract.

Bildisco, as a debtor-in-possession, was not a party to

the collective bargaining agreement, and therefore

not bound by §8(d). Shopmen’s Local Union No.

455 v. Kevin Steel Products, Inc., 519 F.2d 698, 704

(2d Cir. 1975). The burden of persuading the bank-

ruptey court to permit rejection of a collective bar-

gaining agreement must be placed on the moving

party: the debtor-in-possession or the trustee. Our

critical task is to establish the extent of that burden.

The usual test for rejection of an executory con-

tract is simply whether rejection would benefit the

estate, the business judgment“ test. See 2 Collier

on Bankruptcy { 365.03 (15th ed. 1981). The im-

pact of rejection of a collective bargaining agreement

on the rights of workers and the favored status those

rights have been accorded by Congress, however, re-

quire a more stringent examination of the evidence

offered to justify rejection of such a contract. The

second circuit in Kevin Steel, speaking through Judge

Feinberg, accommodated the interests of the workers

by holding that rejection of a collective bargaining

agreement requires “ ‘thorough scrutiny, and a care-

13a

ful balancing of the equities on both sides.“ 519

F.2d at 707 (quoting Jn re Overseas National Air-

ways, Inc., 238 F.Supp. 359, 361 (E.D.NY. 1965) ).

We accept this formulation of the appropriate rela-

tionship between the competing statutory policies. It

accommodates the statutory policies of the Labor Act

by demanding a greater evidentiary showing than for

rejection of a typical executory contract, but it does

not erect impossible barriers to rejection of labor

contracts in violation of the policies underlying Chap-

ter 11. It plots a middle course between the possible

extremes, requiring a sensitive weighing of the com-

peting private and public interests in the context of

the particular case.

We reject, however, the formulations of subsequent

decisions pressed on us by the union and the Board,

which purport to follow the rule of Kevin Steel but

instead replace its “balancing of the equities” with a

test predicating permission to reject on a showing

“that an onerous and burdensome executory collective

bargaining agreement will thwart efforts to save a

failing carrier in bankruptcy from collapse.” Broth-

erhood of Railway, Airline and Steamship Clerks v.

REA Express, Inc., 523 F.2d 164, 169 (2d Cir.),

cert. denied, 423 U.S. 1017, 1073 (1975). Accord-

They reflect a phenomenon that our distinguished, former

colleague, the late William H. Hastie, called “trampling upon

graves”: adding a substantial gloss to a previously stated

holding but improperly citing the former case as the authority

for the new formulation. Of course, the development of the

law often consists of adding gloss to previous cases, as Car-

dozo described it: “Given a mass of particulars, a congeries

of judgments on related topics, the principle that unifies and

rationalizes them has a tendency, and a legitimate one, to

project and extend itself to new cases within the limits of its

14a

ing to REA Express, rejection should be permitted

“only where it clearly appears to be the lesser of two

evils and that, unless the agreement is rejected, the

carrier will collapse and the employees will no longer

have their jobs.” Jd. at 172. The district court in

this case and the court in Jn re Alan Wood Steel Co.,

449 F.Supp. 165 (E.D.Pa. 1978), appeal dismissed,

595 F.2d 1211, 1214 (3d Cir. 1979), apparently

building on REA Express and In re Penn Fruit Co.,

92 L.R.R.M. (BNA) 3548 (E.D. Pa. 1976), declared

that Kevin Steel required a two step analysis:

First, the court should determine that the agree-

ment is onerous and burdensome to the estate, so

that failure to reject will make a successful ar-

rangement impossible. Second, the equities must

be balanced and found to favor the debtor. Then,

and only then, may rejection of a collective bar-

gaining agreement be permitted.

449 F. Supp. at 169, quoted in district court op. at

4-5 (emphasis added).

The italicized portion of the first step, in our view,

goes well beyond the “balancing of equities” required

by Kevin Steel. We reject this more stringent test for

two discrete but related reasons: first, for the prag-

matic reason that it may be impossible to predict the

success vel non of a reorganization until very late in

the arrangement proceedings; and second, for the

prudential consideration that the imposition of such

a test unduly exalts the perpetuation of the collective

bargaining agreement over the more pragmatic con-

capacity to unify and rationalize.” B. Cardozo, The Nature

of the Judicial Process 31 (1921). But it is quite another

thing to disguise an expansion of the law by pretending that

the court is simply applying a previously stated rule of law.

15a

sideration of whether the employees will continue to

have jobs at all.

At the date of oral argument in these proceedings,

March 19, 1982, Bildisco was still operated by a

debtor-in-possession under the supervision of the

bar «ruptcy court. Thus almost two years after the

pet. ion for reorganization was filed and over a year

after the court granted the debtor-in-possession per-

mission to reject the agreement, there is still no as-

surance that Bildisco wiil successfully reorganize.

We simply do not and cannot know whether it will

be forced into liquidation. It is entirely unrealistic

to require the bankruptcy court at an early stage of

a reorganization proceeding to predict whether re-

organization will be impossible absent rejection of the

labor contract. In the common law tradition the ac-

ceptability or durability of a legal rule is directly

dependent upon its utility. The rule urged upon us

by the NLRB and the union appears to us deficient

because we know of no formula readily available to

a bankruptcy court in an early stage of a Chapter 11

reorganization that could reasonably predict whether

a business reorganization will succeed.

We also reject the more stringent test because it

could work to the detriment of the workers it seeks

to protect. By erecting an excessive evidentiary bar-

rier to rejection of labor contracts, the REA Express-

Alan Wood Steel formulation would make it likely

that numerous businesses attempting to reorganize

will in fact be forced over the line into liquidation.

Adherence to a collective bargaining agreement to-

gether with a successful reorganization is surely the

best of possible worlds; but given the inevitable poten-

tial for conflict between these goals we think it pre-

ferable that jobs be preserved through rejection of

16a

a labor contract than that they be lost because of its

acceptance.

In the multiplicity of fact situations that will arise,

we think our best option is to require the bankruptcy

courts to undertake a “thorough scrutiny, and a care-

ful balancing of the equities on both sides” as set

forth in Kevin Steel. Each case will present its own

complexities. For example, the bankruptcy court

must understand that the debtor-in-possession who

rejects a collective bargaining agreement remains an

employer and is still required by the NLRA to bar-

gain with the representatives of its employees, Kevin

Steel, 519 F.2d at 704, and that its employees retain

their right to strike should negotiations fail, see In

re Ryan Co., 83 Lab. Cas. (CCH) § 10,487 at 17,952

n.2 (D.Conn. 1978). The consequences of a strike on

a precarious business therefore must be one factor to

be weighed by the bankruptcy court. Moreover, be-

cause under § 365(g) rejection constitutes a breach

of contact, the employees may assert a claim for the

value of the benefits lost. The court should consider

both the impact of the resulting claim against the

debtor and the adequacy of the relief employees might

obtain through the claims procedures.“

2 Among other factors bankruptcy courts might consider

in balancing the equities are, for example, the proportion of

the debtor’s employees covered by the collective bargaining

agreement, how those employees’ wages and benefits compare

to those of others in the industry, and the good or bad faith of

the parties in dealing with the effect of the company’s in-

solvency on its labor obligations. See Note, The Bankruptcy

Law’s Effect on Collective Bargaining Agreements, 81 Colum.

L. Rev. 391, 401-08 (1981). The listing of these considerations

is not intended to be all-inclusive.

17a

We are satisfied that Kevin Steel, isolated from its

illegitimate progeny, provides the appropriate frame-

work for an intelligent and equitable approach to the

problem because it gives collective bargaining agree-

ments a measure of protection beyond that available

under the business judgment test without unduly ad-

vancing the interests served by the Labor Act over

the other interests of the employees and those of the

debtor’s other creditors. We believe that the debtor-

in-possession must first demonstrate that the continu-

ation of the collective bargaining agreement would be

burdensome to the estate; that once this threshold

determination has been made the debtor-in-possession

must make a factual presentation sufficient to permit

the bankruptcy court to weigh the competing equities;

that the polestar is to do equity between claims which

arise under the labor contract and other claims

against the debtor; that, in this, the court must con-

sider the rights of covered employees as supported by

the national labor policy as well as the possible “sac-

rifices which other creditors are making” in the effort

to bring about a successful reorganization, Group of

Institutional Investors, 318 U.S. at 550; and that the

court must make a reasoned determination that rejec-

tion of the labor contract will assist the debtor-in-

possession or the trustee to achieve a satisfactory re-

organization. We believe that particularly in a time

of economic uncertainty and distress an analysis fol-

lowing this pattern provides more protection to both

employer and employee than the test urged upon us

by the union and the NLRB.”

According to data supplied by the U.S. Department

nS a a See

to work were unable to find jobs. This constitutes 8.8%

18a

Having identified the considerations properly ap-

plicable to rejections of collective bargaining agree-

ments, we turn to the appeal at No. 81-2140; and we

begin by examining the arguments presented to the

bankruptcy court. The union argued that the proper

test was that articulated in REA Express and Alan

Wood Steel: rejection is permissible only if reorgan-

ization otherwise would be impossible and if the equi-

ties favor the debtor. Counsel for the debtor-in-

possession, on the other hand, submitted that collec-

tive bargaining agreements are to be treated like all

other executory contracts and that rejection should be

permitted whenever it would benefit the debtor.

The bankruptcy court’s bench opinion unfortu-

nately was a woefully inadequate treatment of a

sophisticated subject. It is not clear whether the

bankruptey court chose one of the two standards

the work force and an increase from 3.4% in January-March

1969, 4.6% in October 1973, and 5.7% in May-July 1979. Be-

cause Bildisco is involved in the building supply business, a

business directly associated with the construction business,

and the employees who are covered by the labor contract are

warehousemen, drivers, mechanics, and outside field service-

men, it is significant that 18.1% of the nation’s construction

workers were unemployed compared with 12.5% of blue-

collar workers in general. U.S. News & World Report, March

15, 1982, at 71-73. Under circumstances of a distressed econ-

omy, a bankruptcy court could properly consider that it would

be in the interests of the workers in a bargaining unit to be

afforded the opportunity to continue to work under less gener-

ous financial benefits than to insist upon an absolute payment

of vacation benefits, pension, health and welfare benefits, and

wage increases. In weighing the equities the court could

well conclude that it is in the public interest for employees

to work without the advantage of fringe benefits than not to

work at all.

19a

proffered by the parties or applied a synthesis of the

two.“ Where the state of the law is settled there are

three critical prerequisites to a determination of re-

versible error: (a) specific acts or omissions by the

trial court constituting legal error, (b) properly sug-

gested as error to the trial court, and (c), if uncor-

rected on that level, then properly presented for re-

view to the appellate court. Assuming that the trial

court erred, for there to be reversible error, we must

be able to determine that appellant properly identified

the error and requested the trial court to take a

legally appropriate course of action. Pfeifer v. Jones

& Laughlin Steel, —— F.2d . n. 1, No. 81-

1928 (3d Cir. April 16, 1982), slip op. at 6 n.1. In

the district courts, Fed.R.Civ.P. 46 requires a party

to “[make] known to the court the action which he

desires the court to take or his objection to the action

of the court and his grounds therefor.” This require-

ment affords an opportunity for error correction and

avoidance in the trial court in various ways: It gives

the adversary the opportunity either to avoid the

challenged action or to present a reasoned defense of

the trial court’s action, and it provides the trial court

with the alternatives of modifying its decision or of

ordering a more fully developed record for review. It

also challenges the court to articulate the grounds for

its decision and thus facilitates appellate review.

Where the state of the law is not settled, and the

court of the first instance has not set forth a reasoned

The district court affirmed the bankruptcy court by deter-

mining that, applying either test, the contract was appropri-

ately rejected. The district court’s analysis need not detain

us, however, because our role as a court of review is identical

to that of the district court. Universal Minerals, Inc. v. C.A.

Hughes & Co., 669 F.2d 98, 101-02 (8d Cir. 1981).

20a

elaboration for its decision, as here, an appellate

court cannot determine what motivated the trial

court’s decision. It cannot properly determine whether

there was a specific act or omission constituting legal

error. Even though an appellate court can affirm on

the basis of reasons different from those set forth

by the trial court, Rhoads v. Ford Motor Co., 514

F.2d 931 (3d Cir. 1975), a reviewing court cannot

properly perform its function until the parties are

given the opportunity to prepare a record and the

trial court the opportunity to apply in the first in-

stance newly formulated precepts to the facts ad-

duced. Because we have set forth in detail the ap-

propriate precepts to apply in a hitherto unsettled

area of the law, and because we do not have the bene-

fit of an adequate explanation of the trial court’s

action, the preferable course is to remand the proceed-

ings for reconsideration in light of the precepts we

announce today. Accordingly, we vacate the judg-

ment of the district court and remand to it with a

direction that the cause be further remanded to the

bankruptcy judge for reconsideration.

VI.

We now turn to the Board’s application at No.

81-2238 for the enforcement of its summary judg-

ment determining that the debtor-in-possession had

committed an unfair labor practice.

It must be emphasized that we are not faced with

an application for enforcement of an NLRB order

entered after reception of evidence by an adminis-

trative law judge and a review of the record by the

Board. We have only an application for enforcement

of summary judgment; our denial of enforcement

does not preclude the Board from processing the

2la

charges through a full hearing, guided and governed

by the bankruptcy court’s determination on remand

concerning the rejection of the collective bargaining

agreement, and by the views which we have expressed

in this opinion.

The basis of the unfair labor practice charges is an

allegation that the debtor-in-possession unilaterally

changed the terms of the collective bargaining agree-

ment and thereby failed to bargain in good faith, in

violation of sections 8(a)(1) and (5) of the NLRA.

The Board’s theory depends upon its contention that

the debtor-in-possession is an alter ego of the debtor

and thereby a party to the collective bargaining

agreement. The Board’s argument fails, however,

because, as a matter of law, a debtor-in-possession is

a] new entity . . . created with its own rights and

duties, subject to the supervision of the bankruptcy

court.” Kevin Steel, 519 F.2d at 704 (footnote

omitted). A debtor- in- possession is given powers

comparable to those of a trustee, and it is thus an

officer of the court. 11 U.S.C. § 1107. As the House

and Senate Reports explaining § 1107 emphasize:

This section places a debtor in possession in

the shoes of a trustee in every way. The debtor

is given the rights and powers of a chapter 11

trustee. He is required to perform the functions

and duties of a chapter 11 trustee (except the

investigative duties). He is also subject to any

limitations on a chapter 11 trustee, and to such

other limitations and conditions as the court

prescribes.

H.R. Rep. No. 595, 95th Cong., Ist Sess. 404 (1977),

reprinted in 1978 U.S. Code Cong. & Ad. News 5963,

22a

6360; S. Rep. No. 989, 95th Cong., Ist Sess. 116

(1978), reprinted in 1978 U.S. Code Cong. & Ad.

News 5787, 5902. The debtor-in-possession’s position

is analogous to that of a successor employer: it may

be required to recognize and bargain with the un' n,

but it is not a party to its predecessor’s collective

bargaining agreement unless it assumes that agree-

ment. NLRB v. Burns Security Services, Inc., 406

U.S. 272, 284 (1972); Kevin Steel, 519 F.2d at 704.

Because Bildisco as debtor-in-possession is not a party

to the agreement with Local 408, it had the ability

to reject the agreement without following the proce-

dures outlined in §8(d). We suggest to the NLRB

that, at least in matters within this judicial circuit,

it cease operating under such a fundamental miscon-

ception of the law. Indeed, we believe that persisting

in such a misconception—one that goes to the differ-

ence between the pre-bankruptcy company which was

the signatory to the collective bargaining agreement

and the succeeding debtor-in-possession—is so fun-

damental that this error in and of itself is sufficient

reason to refuse to enforce a summary judgment so

predicated.

The Board contends, however, that this court may

not consider Bildisco’s defenses to the unfair labor

practice complaint because they were not urged be-

fore the Board in a timely manner. Section 10 (e)

of the NLRA, 29 U.S.C. §160(e), provides that

njo objection that has not been urged before the

Board, its member, agent or agency, shall be con-

sidered by the court, unless the failure or neglect to

urge such objection shall be excused because of ex-

traordinary circumstances”; and the Supreme Court

has consistently held that, in the absence of extraor-

23a

dinary circumstances, “the failure or neglect of a re-

spondent to urge an objection in the Board’s proceed-

ings forecloses judicial consideration of the objection

in enforcement proceedings.” NLRB v. Ochoa Ferti-

lizer Corp., 368 U.S. 318, 322 (1961). The Board

contends that the debtor-in-possession’s sole excuse for

its failure to file an answer was the disruption in its

operations caused by reorganization proceedings, and

that this excuse would not come within § 10(e)’s “ex-

traordinary circumstances” exception.

We hold that $10(e) is inapplicable to this case

because the objection was urged before the Board at

a time when the Board could have taken meaningful

notice of it. Inasmuch as the date of the hearing had

not yet passed, the Board’s draconian remedy was

unwarranted. We have recently observed that

an administrative agency like the NLRB, bur-

dened with an extremely heavy caseload, must

necessarily rely upon compliance with procedural

rules to function efficiently. As part of the proc-

ess, reasonable time limitations must be set and

observed. Nevertheless, there are instances where

wooden and unreasoning insistence upon techni-

cal procedural rules results, not in the proper

disposition of a cause, but in injustice. Failure

to take remedial measures when such incidents

occur constitutes an abuse of discretion.

Livingston Powdered Metal, Inc. v. NLRB, 669 F.2d

133, 187 (3d Cir. 1982). We recognize that the re-

sponse to the complaint here was exceedingly tardy,

more so than in Livingston or its companion case of

Kessler Institute for Rehabilitation v. NLRB, 669

F.2d 138 (3d Cir. 1982). But in National Book Con-

solidators, Inc. v. NLRB, 672 F.2d 323 (8d Cir.

24a

1982), we required the Board to “utilize a ‘good

cause’ standard in determining whether to accept

filing of an answer,” explaining that ‘[t]he purpose

of the “good cause” standard . . . is to ensure that the

Board makes decisions on the merits despite technical

and inadvertent noncompliance with procedural

rules.“ Id. at 326 (quoting NLRB v. Zeno Table

Co., 610 F.2d 567, 569 (9th Cir. 1979) ).

We do not suggest that the mere fact that a debtor-

in-possession is implicatec in the proceedings is itself

sufficient reason for a delay. But the drastic circum-

stances here, where a work force of eighteen union

members had been reduced to three in a business inti-

mately associated with the construction industry, one

of the most distressed industries of the present re-

cession, and where the pre-bankruptcy company had

been in active reorganization by a debtor-in-possession

for over a year, we believe that the Board was pre-

sented with a “good cause” for accepting an untimely

response and proceeding to consider what appears to

us to be a most persuasive argument on the merits.

The timetable is significant. The amended com-

plaint was filed October 8, 1980, and set a March 9,

1981, hearing date. On February 20, 1981, respond-

ing to the Board’s order to show cause, Bildisco noti-

fied the Board that the bankruptcy court had entered

an order on January 15, 1981, granting its motion to

reject the labor contract. We do not condone the fail-

ure of the debtor-in-possession to respond to the com-

plaint, but we will not enforce a Board order that

cavalierly refuses to recognize an outstanding federal

court order directly relating to the proceedings

before it. Because rejection related back to the day

before the Chapter 11 petition was filed, 11 U.S.C.

§ 365(g) (1), no labor contract effectively existed be-

25a

tween the union and the debtor-in-possession, subse-

quent to April 14, 1980. In its thirteen page decision

and order dated April 23, 1981, however, the Board

failed even to acknowledge, much less to consider the

effect of, the bankruptcy court order permitting re-

jection.

The Board did not explain how, as an agency of

the executive branch, it can ignore the order of a fed-

eral court. We perceive no excuse for this disregard.

It is as much a departure from acceptable decision-

making for the NLRB to decide a case within its com-

petence without accommodating competing principles

of bankruptcy law as it would be for a bankruptcy

court to decide a labor contract issue without accom-

modating competing principles of our national labor

policy. Whatever the debtor-in-possession’s technical

breach of the NLRB’s procedural rules, it does not

excuse the agency’s refusal to recognize the existence

of the outstanding bankruptcy court order and to give

some explanation why that order would be irrelevant

to its proceedings.

We therefore conclude, for all the foregoing rea-

sons, that the NLRB both erred as a matter of law

and misused its discretion in granting the motion for

summary judgment. Because the summary judgment

included pre-petition charges as well as those relating

to activities subsequent to the filing of the bankruptcy

petition, it will be for the NLRB in the first instance

to separate the two types of charges at any subse-

quent proceeding. Where charges of unfair labor

practices arise both before and avter the date of a

Chapter 11 petition, the rejection of a collective bar-

gaining agreement would not affect the obligations of

the employer under 580d) prior to the date of the

petition. We agree with the Board that a monetary

26a

claim resulting from a Board order in such circum-

stances is governed by bankruptcy law and may be

filed as the claim of a creditor in the bankruptcy

court. See Reply Br. at 7.

It would seem, however, that the Board must await

the determination of the bankruptcy court on remand

before it may proceed to consider the post-petition

charges. If under the precepts we announce today

the bankruptey judge again permits the rejection of

the collective bargaining agreement, the Board will be

bound by that determination, which would preclude

any post-petition unfair labor practice arising from

the rejected agreement.

VII.

The judgment of the distriet court at No. 81-2140

will be vacated and the cause remanded to it with a

direction of a further remand to the bankruptcy judge

for reconsideration in light of the foregoing. The

NLRB’s application for enforcement at No. 81-2238

will be denied without prejudice, for the reasons here-

inabove expressed.

27a

APPENDIX B

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

Nos. 81-2140 and 81-2238

IN RE: BiLpisco, A General Partnership of

the State of New Jersey,

LOCAL 408, INTERNATIONAL BROTHERHOOD OF

TEAMSTERS, CHAUFFEURS, WAREHOUSEMEN

AND HELPERS OF AMERICA, APPELLANT, No. 81-2140

NATIONAL LABOR RELATIONS BOARD,

INTERVENOR

Appeal from the United States District Court

for the District of New Jersey

(D.C. Civil No. 81-0513)

NATIONAL LABOR RELATIONS BOARD,

PETITIONER, No. 81-2238

Vs.

BILDISCO AND BILDISCO,

DEBTOR-IN-POSSESSION, RESPONDENT

LOCAL 408, INTERNATIONAL BROTHERHOOD OF

TEAMSTERS, CHAUFFEURS, WAREHOUSEMEN

AND HELPERS OF AMERICA, INTERVENOR

28a

National Labor Relations Board

Application for Enforcement

Present: ALDISERT, VAN DUSEN and GARTH, Cir-

cuit Judges.

JUDGMENT

These causes came on to be heard on the records

from the United States District Court for the District

of New Jersey and from the National Labor Relations

Board and were argued by counsel on March 19,

1982.

On consideration whereof, it is now here ordered

and adjudged by this Court that the judgment of the

said District Court entered May 6, 1981, be, and the

same is hereby vacated and the cause remanded to

the said District Court for further remand to the

Bankruptcy Court for reconsideration in light of the

opinion of this Court.

It is further ordered and adjudged that the Na-

tional Labor Relations Board’s application for en-

forcement, filed August 6, 1981, be, and the same is

hereby denied.

Costs taxed against petitioner in C.A. No. 81-

2238.

ATTEST:

/s/ Sally Mrvos

Clerk

June 17, 1982

29a

APPENDIX C

255 NLRB No. 154 FJZ

5—7640——

Avenel, Nd

UNITED STATES OF AMERICA

BEFORE THE

NATIONAL LABOR RELATIONS BOARD

Case 22—CA—10061

BILDISCO AND BILDISCO,

DEBTOR IN POSSESSION

and

LOCAL 408, INTERNATIONAL BROTHERHOOD OF

TEAMSTERS, CHAUFFEURS, WAREHOUSEMEN AND

HELPERS OF AMERICA

DECISION AND ORDER

Upon a charge and amended charges filed on June

3, July 16, and August 28, 1980, respectively, by Local

408, International Brotherhood of Teamsters, Chauf-

feurs, Warehousemen and Helpers of America, herein

called the Union, and duly served on Bildisco and

Bildisco, Debtor in Possession, herein collectively

called Respondent, the General Counsel of the Na-

tional Labor Relations Board, by the Regional Direc-

tor for Region 22, issued a complaint and notice of

hearing on July 31, 1980, and a first amended com-

plaint and notice of hearing on October 8, 1980,

against Respondent, alleging that Respondent had en-

gaged in and was engaging in unfair labor practices

affecting commerce within the meaning of Section 8

30a

(a) (5) and (1) and Section 266) and (7) of the

National Labor Relations Act, as amended. Copies of

the charges and complaints and notices of hearing be-

fore an administrative law judge were duly served

on the parties to this proceeding.

With respect to the unfair labor practices, the

complaint alleges in substance that the Union is the

exclusive representative of certain of the Respondent's

employees in a unit appropriate for the purposes of

collective bargaining within the meaning of Section

9(b) of the Act, and that since on or about January 3,

1980, and at all times thereafter, Respondent has

refused and is now refusing to bargain collectively

with the Union by unilaterally changing existing

terms and conditions of employment of its employees

in the appropriate unit, as contained in its collective-

bargaining agreement with the Union, regarding re-

mittance of union dues, payment of pension, health,

and welfare contributions, and payment of vacation

benefits and wage increases. Respondent failed to file

a timely answer to the complaint.

On February 2, 1981, counsel for the General

Counsel filed directly with the Board a Motion for

Summary Judgment based upon Respondent’s failure

to file an answer as required by Sections 102.20 and

102.21 of the Board’s Rules and Regulations, Series

8, as amended. In a response to the General Counsel’s

motion, Respondent requested a 60-day stay of these

proceedings to allow it to apply to the United States

1 All warehousemen, drivers and mechanics including

straight truck drivers, outside field servicemen, order pickers,

helpers, working foremen, employed at Respondents’ Avenel

place of business, but excluding all office clerical employees,

professional employees, guards and supervisors as defined in

the Act.

31a

Bankruptcy Court for authorization to retain special

counsel to represent it in these proceedings. Counsel

for the General Counsel opposed Respondent’s request.

Subsequently, on February 9, 1981, the Bogrd issued

an order transferring the proceeding e Board

and a Notice To Show Cause why the General Coun-

sel’s Motion for Summary Judgment should not be

granted. Thereafter, Respondent filed a response to

the Notice To Show Cause, including affirmative de-

fenses, and counsel for the General Counsel filed a

response to Respondent’s response.

Upon the entire record in this proceeding, the Board

makes the following:

Ruling on the Motion for Summary Judgment

Section 102.20 of the Board’s Rules and Regula-

tions, Series 8, as amended, provides as follows:

The respondent shall, within 10 days from the

service of the complaint, file an answer thereto.

The respondent shall specifically admit, deny, or

explain each of the facts alleged in the complaint,

unless the respondent is without knowledge, in

which case the respondent shall so state, such

statement operating as a denial. All allegations

in the complaint, if no answer is filed, or any

allegation in the complaint not specifically denied

or explained in an answer filed, unless the re-

spondent shall state in the answer that he is with-

out knowledge, shall be deemed to be admitted to

be true and shall be so found by the Board, unless

good cause to the contrary is shown.

The complaints and notices of hearing served on

Respondent herein specifically state that unless an

answer to the complaint is filed within 10 days of

service thereof “all of the allegations contained in the

32a

Complaint shall be deemed to be admitted to be true

and may be so found by the Board.” Further, accord-

ing to the uncontroverted allegations of the Motion

for Summary Judgment, a Board agent met with Sal

Valente, a general partner of Respondent, on Septem-

ber 24, 1980, and informed him of his obligation to

file an answer, which was already past due, to the

complaint issued on July 31. By letter dated October

27, 1980, a Board agent, confirming a telephone con-

versation of that date, advised Valente that no answer

had been received to the first amended complaint and

that summary judgment would be sought if no answer

was received by October 31, 1980.

In its response to the Notice To Show Cause, Re-

spondent states that its failure to file an answer was

due to the disruption in its operations caused by its

reorganization proceedings in the United States Bank-

ruptey Court. Respondent further states that it is

currently attempting to obtain court approval to re-

tain special labor counsel but has not to date received

the requisite order from the court. In his response,

counsel for the General Counsel states, as he did in

his response to Respondent’s letter of January 29,

1981, that Respondent had more than 6 months to file

an answer or seek an extension of time to file an

answer in order to obtain court authorization to em-

ploy labor counsel, and failed to do so.

As indicated above, Respondent was served with

the complaint and first amended complaint on July 31

and October 8, 1980, respectively, at which times it

was engaged in proceedings before the bankruptcy

court. It was notified several times of its obligation

to file an answer or to request an extension of time

to do so, but failed to do either. The response to the

Notice To Show Cause does not explain why Re-

83a

spondent failed to contact the Regional Office con-

cerning an answer or an extension of time to file an

answer. Accordingly, we find that Respondent’s re-

sponse does not constitute good cause under our rules

for its failure to file a timely answer.“ Therefore, in

accordance with the rule set forth above, the allega-

tions of the first amended complaint are deemed to

be admitted to be true and are so found by the Board,

Ind the General Counsel’s Motion for Summary Judg-

ment is granted.

On the basis of the entire record, the Board makes

the following:

Findings of Fact

I. The Business of Respondent

Bildisco, a partnership duly organized under, and

existing by virtue of, the laws of the State of New

Jersey, with its principal office and place of business

in Avenel, New Jersey, is and has been at all times

material herein continuously engaged in the retail and

wholesale sale and distribution of building and supply

products. During the 12-month period ending June 3,

1980, Bildisco caused to be purchased, transferred,

and delivered to the Avenel place of business building

supplies and other materials valued in excess of $50,-

000, of which goods and materials valued in excess of

$50,000 were transported to the Avenel place of busi-

ness directly from points outside the State of New

Jersey. Since on or about April 17, 1980, Bildisco has

been duly designated as Debtor-in-Possession for

Bildisco pursuant to a voluntary arrangement pro-

2 See World Services Corporation and/or Peggs Coal Com-

pany; and World Services Corporation, Debtor in Possession,

247 NLRB No. 201 (1980); Evans Express Company, Inc.

and Intercontinental Systems, Inc., 232 NLRB 655 (1977).

84a

ceeding in the United States Bankruptcy Court of the

District of New Jersey, and as such has full authority

to continue the operation of and exercise all powers

necessary to the administration of the business of

Bildisco.

We find, on the basis of the foregoing, that Bildisco,

Debtor-in-Possession, is, and has been at all times

material herein since April 17, 1980, an alter ego in

bankruptcy to Bildisco and that Bildisco and Bildisco,

Debtor-in-Possession, collectively called Respondent,

is, and has been at all times material herein, an em-

ployer engaged in commerce within the meaning of

Section 2(6) and (7) of the Act, and that it will

effectuate the policies of the Act to assert jurisdiction

herein.

II. The Labor Organization Involved

Local 408, International Brotherhood of Teamsters,

Chauffeurs, Warehousemen and Helpers of America,

is a labor organization within the meaning of Section

2(5) of the Act.

III. The Unfair Labor Practices

The following employees of Respondent constitute

a unit appropriate for the purposes of collective bar-

gaining within the meaning of Section 9(b) of the

Act:

All warehousemen, drivers and mechanics includ-

ing straight truck drivers, outside field service

men, order pickers, helpers, working foremen,

employed at Respondent’s Avenel place of busi-

ness, but excluding all office clerical employees,

professional employees, guards and supervisors

as defined in the Act.

35a

On or before May 1, 1979, a majority of the em-

ployees of Respondent in the unit described above

designated and selected the Union as their representa-

tive for the purpose of collective bargaining, and since

on or before May 1, 1979, the Union has been and is

now, pursuant to Section 90a) of the Act, the ex-

clusive representative of the employees in the unit

described above for the purposes of collective bargain-

ing with respect to rates of pay, wages, hours of em-

ployment, and other terms and conditions of employ-

ment. As a result of the representative status of the

Union, Respondent and the Union have entered into

successive collective-bargaining agreements, the most

recent of which is effective from May 1, 1979, through

April 30, 1982.

Since on or about January 3, 1980, Respondent has

unilaterally changed existing terms and conditions of

employment of its employees in the unit described

above by failing and refusing to: make required pen-

sion, health, and welfare contributions; remit to the

Union the dues withheld from the pay of employees;

and pay vacation benefits, all as required by the

collective-bargaining agreement described above.

Since on or about May 1, 1980, Respondent has uni-

laterally changed existing terms and conditions of

employment of its employees in the unit described by

failing and refusing to pay wage increases as re-

quired by the collective-bargaining agreement.

Accordingly, we find that by the aforesaid conduct

Respondent has failed and refused, and is now failing

and refusing, to bargain collectively with the Union

as the exclusive representative of its employees in the

appropriate unit. By such conduct, Respondent has

engaged in, and is engaging in, unfair labor practices

within the meaning of Section 8(a)(5) and (1) of

the Act.

86a

IV. The Effect of the Unfair Labor Practices Upon

Commerce

The activities of Respondent, set forth in section

III, above, occurring in connection with its operations

described in section I, above, have a close, intimate,

and substantial relationship to trade, traffic, and com-

merce among the several States and tend to lead to

labor disputes burdening and obstructing commerce

and the free flow of commerce.

V. The Remedy

Having found that Respondent has engaged in and

is engaging in unfair labor practices within the mean-

ing of Section 8(a)(5) and (1) of the Act, we shall

order that it cease and desist therefrom and take cer-

tain affirmative action designed to effectuate the poli-

cies of the Act.

Such affirmative action shall include that Respond-

ent recognize and deal with the Union as the exclusive

bargaining representative of its employees in the ap-

propriate unit by honoring the collective-bargaining

agreement executed by it on May 1, 1979, in all its

terms.

Additionally, we have found that Respondent has

made unilateral changes in certain terms and condi-

tions of employment in violation of Section 8(a) (5)

and (1) of the Act. In order to dissipate the effect

of these unfair labor practices, we shall order Re-

spondent to make whole its employees by making the

required pension, health, and welfare contributions

that it has failed to pay since January 3, 1980, re-

Because the provisions of employee benefit fund agree-

ments are variable and complex, the Board does not provide

at the adjudicatory stage of a proceeding for the addition of

37a

mitting to the Union the dues it has withheld from

its employees’ paychecks since January 3, 1980, pay-

ing the vacation benefits it has failed to pay since

January 3, 1980, and paying the wage increases it has

failed to pay since May 1, 1980, plus interest on the

dues, vacation benefits, and wage increases as pre-

scribed in Florida Steel Corporation, 231 NLRB 651

(1977).*

The Board, upon the basis of the foregoing facts

and the entire record, makes the following:

Conclusions of Law

1. Bildisco and Bildisco, Debtor-in-Possession, is

an employer engaged in commerce within the mean-

ing of Section 2(6) and (7) of the Act.

2. Local 408, International Brotherhood of Team-

sters, Chauffeurs, Warehousemen and Helpers of

interest at a fixed rate on unlawfully withheld fund payments.

We leave to the compliance stage the question of whether

Respondent must pay any additional amounts into the bene-

fit funds in order to satisfy our make-whole“ remedy. These

additional amounts may be determined, depending upon the

circumstances of each case, by reference to provisions in the

documents governing the funds at issue and, where there

are no governing provisions, to evidence of any loss directly

attributable to the unlawful withholding action, which might

include the loss of return on investment of the portion of

funds withheld, additional administrative costs, etc., but not

collateral losses. See Merryweather Optical Company, 240

NLRB 1213, 1216, fn. 7 (1979).

See Ogle Protection Service, Inc. and James L. Ogle, 183

NLRB 682, 683 (1970); and see, generally, Isis Plumbing &

Heating Co., 188 NLRB 716 (1962). In accordance with his

partial dissent in Olympic Medical Corporation, 250 NLRB

No. 11 (1980), Member Jenkins would award interest on the

backpay due based on the formula set forth therein.

38a

America, is a labor organization within the meaning

of Section 2(5) of the Act.

3. All warehousemen, drivers and mechanics in-

cluding straight truck drivers, outside field service

men, order pickers, helpers, working foremen, em-

ployed at Respondent’s Avenel place of business, but

excluding all office clerical employees, professional em-

ployees, guards and supervisors as defined in the Act,

constitute a unit appropriate for the purposes of col-

lective bargaining within the meaning of Section 9(b)

of the Act.

4. At all times material herein, the above-named

labor organization has been and now is the exclusive

representative of all employees in the aforesaid ap-

propriate unit for the purpose of collective bargaining

within the meaning of Section 9(a) of the Act.

5. By unilaterally failing and refusing, since on

or about January 3, 1980, and at all times thereafter,

to make required pension, health, and welfare con-

tributions, to remit to the Union the dues withheld

from its employees’ pay, and to pay vacation benefits,

and by unilaterally failing and refusing since on or

about May 1, 1980, and at all times thereafter, to pay

wage increases to its employees, all as required by its

collective-bargaining agreement with the Union, Re-

spondent has engaged in and is engaging in unfair

labor practices within the meaning of Section 8(a) (5)

and (1) of the Act.

6. The aforesaid unfair labor practices are unfair

labor practices affecting commerce within the mean-

ing of Section 2(6) and (7) of the Act.

ORDER

Pursuant to Section 10(c) of the National Labor

Relations Act, as amended, the National Labor Rela-

39a

tions Board hereby orders that the Respondent, Bil-

disco and Bildisco, Debtor-in-Possession, Avenel, New

Jersey, its officers, agents, successors, and assigns,

shall:

1. Cease and desist from:

(a) Refusing to bargain collectively with the Union

as the exclusive bargaining representative of its em-

ployees in the following appropriate unit:

All warehousemen, drivers and mechanics includ-

ing straight truck drivers, outside field service

men, order pickers, helpers, working foremen,

employed at Respondent’s Avenel place of busi-

ness, but excluding all office clerical employees,

professional employees, guards and supervisors

as defined in the Act.

(b) Failing and refusing to make pension, health,

and welfare contributions, to remit to the Union dues

withheld from its employees’ pay, to pay vacation

benefits, and to pay wage increases, all as required by

its collective-bargaining agreement with the Union.

restraining, or coercing employees in the exercise of

the rights guaranteed them in Section 7 of the Act.

2. Take the following affirmative action to effectu-

ate the policies of the Act:

(a) Recognize and bargain with the Union as the

exclusive representative of its employees in the afore-

said appropriate unit by honoring the collective-

bargaining agreement executed by it on May 1, 1979,

in all its terms.

(b) Make whole its employees, in the manner set

forth in the section of this Decision entitled “The

Remedy,” by making the required pension and health

40a

and welfare contributions it has failed to pay since

January 3, 1980, by remitting to the Union the dues

it has withheld from its employees’ pay since January

3, 1980, plus interest, by paying the vacation benefits

it has failed to pay since January 3, 1980, plus in-

terest, and by paying to employees any wage in-

creases it has failed to pay since May 1, 1980, plus

interest, all as required by its collective-bargaining

agreement with the Union.

the Board or its agents, for examination and copying,

all payroll records, social security payment records,

timecards, personnel records and reports, and all other

records necessary to analyze the amount of money due

under the terms of this Order.

(d) Post at its Avenel, New Jersey, place of busi-

ness copies of the attached notice marked “Ap-

pendix.” * Copies of said notice, on forms provided

by the Regional Director for Region 22, after being

duly signed by Respondent’s representative, shall be

posted by Respondent immediately upon receipt there-

of, and be maintained by it for 60 consecutive days

thereafter, in conspicuous places, including all places

where notices to employees are customarily posted.

Reasonable steps shall be taken by Respondent to

insure that said notices are not altered, defaced, or

covered by any other material.

5 In the event that this Order is enforced by a Judgment of

a United States Court of Appeals, the words in the notice

reading “POSTED BY ORDER OF THE NATIONAL

LABOR RELATIONS BOARD” shall read “POSTED PUR-

SUANT TO A JUDGMENT OF THE UNITED STATES

COURT OF APPEALS ENFORCING AN ORDER OF THE

NATIONAL LABOR RELATIONS BOARD.”

4la

(e) Notify the Regional Director for Region 22,

in writing, within 20 days from the date of this

Order, what steps have been taken to comply herewith.

Dated, Washington, D.C. April 23, 1981.

JOHN H. FANNING, Chairman

HOWARD JENKINS, IR, Member

DoN A. ZIMMERMAN, Member

NATIONAL LABOR RELATIONS BOARD

[SEAL]

42a

APPENDIX

NOTICE TO EMPLOYEES

Posted by Order of the

National Labor Relations Board

An Agency of the United States Government

WE WILL NOT refuse to bargain collectively with

Local 408, International Brotherhood of Teamsters,

Chauffeurs, Warehousemen and Helpers of America,

as the exclusive representative of all warehousemen,

drivers, and mechanics including straight truck driv-

ers, outside field service men, order pickers, helpers,

working foremen, employed at our Avenel place of

business, but excluding all office clerical employees,

professional employees, guards and supervisors as

defined in the Act.

WE WILL NOT unilaterally change existing terms

and conditions of employment of our employees in the

above-described unit by failing and refusing to make

pension, health, and welfare contributions, to remit to

the Union the dues withhe. d from our employees’ pay,

to pay vacation benefits, and to grant wage increases,

all as required by our collective-bargaining agreement

with the Union.

WE WILL NOT in any like or related manner in-

terfere with, restrain, or coerce our employees in the

exercise of the rights guaranteed them by Section 7

43a

WE WILL make whole our employees by making

the pension and health and welfare contributions we

have failed to pay since January 3, 1980, by remitting

to the Union the dues we have withheld from our

employees’ pay since January 3, 1980, plus interest,

by paying the vacation benefits we have failed to pay

since January 3, 1980, plus interest, and by paying

our employees any wage increases we have failed to

pay since May 1, 1980, plus interest, all as required

by our collective-bargaining agreement with the

Union.

BILDISCO AND BILDISCO,

DEBTOR-IN- POSSESSION

(Employer)

EES K ae ä —

(Representative) (Title)

44a

APPENDIX D

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF NEW JERSEY

Civil Action No. 81-513

IN RE:

BiLpisco, A General Partnership of

the State of New Jersey

May 4, 1981

Trenton, New Jersey

OPINION

BEFORE:

THE HONORABLE ANNE E. THOMPSON, U.S.D.J.

APPEARANCES:

ZAZZALI, ZAZZALI & KROLL, Esds.

By: ALBERT G. KROLL, Esq.

For Local 408

RAVIN, KATCHEN & GREENBERG, ESQS.

By: JACK M. ZACKIN, Esq.

For the Debtor

VINCENT RUSSONIELLA, C. S. R.

Official Court Reporter

THE COURT: This is an appeal from an Order

of the United States Bankruptcy Court for the Dis-

trict of New Jersey filed on January 15, 1981. In

that order, the Bankruptcy Court granted the motion

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of Bildisco, Debtor in Possession, to reject a May 1,

1979 collective bargaining agreement between Bildisco

and Local 408, International Brotherhood of Team-

sters, Chauffeurs, Warehousemen and Helpers of

America (“Union”). An appeal to this Court from

that order followed.

The standard under which we must review a ruling

by the Bankruptcy Court is set out in Rule 810 of the

Rules of Bankruptcy Procedure:

Upon an appeal the district judge may affirm,

modify or reverse a referee’s judgment or order,

or remand with instructions for further proceed-

ings. The court shall accept the referee’s findings

of fact unless they are clearly erroneous, and

shall give due regard to the opportunity of the

referee to judge the credibility of the witnesses.

“If there is a reasonable basis in the record for a

bankruptcy judge’s ultimate findings of fact, a re-

viewing court cannot substitute its own ultimate find-

ings of fact simply because it regards its views as

effecting a more desirable result than that reached by

the bankruptcy judge.” Jn re Botany Industries, 463

F. Supp. 793, 795 (ED Pa. 1978); In re Hollock, 1

B.R. 212, (M.D. Pa. 1979). As a practical matter,

what this means is that a

finding is “clearly erroneous” when although

there is evidence to support it, the reviewing

court is left with the definite and firm conviction

that a mistake has been committed.

United States v. United States Gypsum Co., 333 U.S.

364, 395 (1948); In re Knight, 421 F. Supp. 1387,

1390 (M.D.La.) (1976).

Under Section 365 of the Bankruptcy Code, 11

U.S.C. § 365, a trustee or a debtor in possession is

46a

given the right to reject executory contracts in this

language:

Except as provided (elsewhere), the trustee

subject to the court's approval, may assume or

reject any executory contract or unexpired lease

of the debtor.

The case of Shopmen’s Union No. 455 v. Kevin Steel

Products, 519 F. 2d 698 (2d Cir. 1975) was the lead-

ing opinion dealing with the rejection of collective

bargaining agreements under the old Bankruptcy

Act. Under the new Pankruptey Code, is is not

settled whether the standards developed in Kevin Steel

and those cases which followed it are still applicable

to the rejection of executory contracts. Because we

find that the lower court’s order meets both the old

and the proposed news idards, we do not find it

necessary to resolve this question.

If Section 365 does not incorporate the Kevin Steel

standard, then it is likely that collective bargaining

agreements will not be treated any differently under

§ 365 than any other executory contracts. This being

so, the so-called “business judgment test” for their re-

jection would apply. Under this test, “(i)t is enough,

as a matter of business judgment, rejection of the

burdensome contract may benefit the estate.” Matter

of Minges, 602 F. 2d 38, 43 (2d Cir. 1979).

Under the record as it stands we find ample justi-

fication for the Bankruptcy Court to make the finding

that a rejection by the debtor of the collective bargain-

ing agreement would be a sound exercise of its busi-

ness judgment. Rejection would result in a savings

of approximately $100,000. (T. 7) This alone would

appear to justify rejection under the “business judg-

ment” test.

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On the other hand, it may be that Congress in-

tended to preserve the special treatment accorded to

collective bargaining agreements under former Sec-

tion 313, (now 365). As set forth in Kevin Steel and

its progeny,

The cases suggest that a two step analysis be

employed by the bankruptcy court in deciding

whether to permit rejection of a collective bar-

gaining agreement. . (citations omitted)

First, the court should determine that the agree-

ment is onerous and burdensome to the estate, so

that failure to reject will make a successful ar-

rangement impossible. Second, the equities must

be balanced and found to favor the debtor.

Matter of Alan Wood Steel Co., 449 F. Supp. 165, 169

(E.D. Pa. 1978).

The Bankruptcy Court did not make a specific find-

ing as to the test to be applied in the rejection of the

collective bargaining agreement. It merely notes that

“this is not a case under the Bankruptcy Act; it is

under the Bankruptcy Code.” (Tr. 36). However, we

feel that there was evidence before the Bankruptcy

Court upon which it could reasonably base the find-

ings required by the Kevin Steel test, and therefore,

we cannot say that its ruling was “clearly erroneous.”

First, the Court heard testimony that the credi-

tors who approved the plan believed that the rejec-

tion of the union contract was “highly involved” with

the success of the plan. (Tr. 8) The Court itself

noted that the testimony established that rejection

would save the debtor some $100,000 per year. (Tr.

31) Therefore, the Court did have a basis upon which

it could find that the collective bargaining agreement

was burdensome to the debtor.

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Second, the Court did weigh the equities in this

matter. It noted that

the union and the employes have a right to claim

damages as a result of the rejection of the con-

tract. They can file a complaint for the purpose

of having damages fixed... and there will have

to be a trial on the damages to ascertain what

the damages will be.

(Tr. 32)

The transcript of the hearing in this matter re-

veals that the Court found that the collective bargain-

ing agreement was burdensome to the debtor, and

that it would be to his distinct advantage to reject

the agreement. Furthermore, the Court found that

although the union and the employees would suffer

injury as a result of the rejection, given their right

to seek damages, the injury which they would suffer

would not outweigh the advantage to the debtor from

rejection.

Because we believe that there exists ample evidence

in the record—and we note as the Bankruptcy Court

did that the moving party’s evidence was uncontra-

dicted by the opposing side—to support the order

below, we do not believe that any error was com-

mitted by the Bankruptcy Judge. Accordingly, the

order will be affirmed.

The Court will enter an appropriate form of order.

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APPENDIX E

UNITED STATES DISTRICT COURT

DISTRICT OF NEW JERSEY

Civil No. 81-513

IN THE MATTER OF:

BiLpisco, A General Partnership

of the State of New Jersey, DEBTOR

ORDER AFFIRMING JANUARY 15, 1981

ORDER OF BANKRUPTCY COURT

This matter being brought before the Court on ap-

peal from an order granting the motion of the Debtor

in Possession, Bildisco, to reject the Executory Con-

tract dated May 1, 1979 with Teamsters Union Local

No. 408 brought by Local 408, International Brother-

hood of Teamsters, Chauffeurs, Warehousemen & Help-

ers of America, by Zazzali, Zazzali & Kroll, P. A.,

Albert G. Kroll, Esquire, appearing; and Ravin,

Katchen & Greenberg, P.A., counsel for Bildisco, Jack

M. Zackin, Esquire, appearing; and the Court, having

considered the arguments of counsel and the papers

submitted; it is on this 5th day of May, 1981,

ORDERED that the order entered in this matter on

January 15, 1981, granting the motion of the debtor

in possession to reject the Executory Contract be and

hereby is affirmed.

[Filed May 6, 1981]

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APPENDIX F

UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF NEW JERSEY

No. 80-07283

IN THE MATTER OF:

BiLtpisco, A General Partnership

of the State of New Jersey, DEBTOR

In Proceedings for a Reorganization under

Chapter 11 of the Bankruptcy Code

ORDER

This matter being opened to the Court by Ravin

Katchen & Greenberg, P.A. on the return date of

Notice to Reject Executory Union Contract with

Teamsters Union Local No. 408, in the presence of

Zazzali, Zazzali & Kroll, Esqs, the Court having con-

sidered the testimony and evidence presented, and

having considered the arguments of counsel in opposi-

tion to the Motion of the Debtor, and due cause

appearing ;

IT IS on this 15th day of January 1981;

ORDERED:

1. That the Motion of the Debtor in Possession to

reject Executory Union Contract dated May 1, 1979

with Teamsters Union Local No. 408, be and hereby

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