Petitioners Reply Brief — National Labor Relations Board v. Bildisco & Bildisco

Nos. 82-818 and 82-852

OCTOBER TERM, 1983

+

NATIONAL LABOR RELATIONS BOARD, PETITIONER

V.

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

LocAL 408, INTERNATIONAL BROTHERHOOD

OF TEAMSTERS, ETC., PETITIONER

V.

NATIONAL LABOR RELATIONS BOARD, ET AL.

ON WRITS OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE THIRD CIRCUIT

REPLY BRIEF FOR

THE NATIONAL LABOR RELATIONS BOARD

Rex E. LEE

Solicitor General

Department of Justice

Washington, D.C. 20530

(202) 633-2217

WILLIAM A. LUBBERS

General Counsel

National Labor Relations Board

Washington, D.C. 20570

TABLE OF AUTHORITIES

Cases: Page

Ahrens Aircraft, Inc. v. NLRB, 703 F.2d 23 15

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

ES / .... 13

Allied Chemical Workers Local Union No. 1 v.

Pittsburgh Plate Glass Co., 404 U.S. 157 8

Ateco Equipment, Inc., In re, 18 Bankr. 9185 10

Blue Ribbon Transportation Co., In re, BK No.

8300362 (Bankr. D.R.I. June 24, 1983 7

Brotherhood of Railway Employees v. REA Ex-

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

% 79 1, 2, 4, 5, 6, 7, 9

Connecticut Celery Co., In re, 106 L. R. R. M.

r !... 6

David A. Rosow, Inc., In re, 9 Bankr. 190 22 6

Federal s, Inc. v. Edmonton Investment Co.,

r 12

Fibreboard Paper Products Corp. v. NLRB, 379

r 18

First National Maintenance Corp. v. NLRB, 452

1 2 x

Fletcher v. Surprise (In re Northern Indiana Oil

Co.), 180 F.2d 669, cert. denied, 340 U.S. 824 16

Innkeepers of New Castle, Inc., In re, 671 F.2d

221, cert. denied, No. 82-221 (Oct. 12, 1982) 12

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

6138 F.2d 210 14

Mammoth Mart, Inc., In re, 586 F.2d 980 4

McCormick Lumber & Mfg. Corp., In re, 144 F.

Supp. 804 15

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

E.D. Mich. June 17, 1982) 6

NLRB v. American National Insurance Co., 343

US. 396 8

NLRB v. Evans Plumbing Co., 689 F234 291... 15

NLRB V. Jones & Laughlin Steel Corp., 301 U8.

1 7

Pacific Western Oil Co. v. McDuffie, 8 F. ad 208,

cert. denied, 2868 U.S. 568 16

Cases—Continued Page

Philadelphia Co. v. Dipple, 312 U.S. 168 — 16

Price Chopper Supermarkets, Inc., In re, 19

r 17

Public Ledger, Inc., In re, 161 F. 2d 7222 13

Reading Co. v. Brown, a 3

Reserve Roofing Florida, Inc., In re, 21 Bankr.

— . —— 9

Rochester Shipbuilding Corp., In re, 32 F. Supp

. A ¹ •-ẽmnmĩ ]’ - - e e 15

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

Products, Inc., 519 F.2d 698 .................. 1, 2, 4, 5, 6, 7,9

Smith Jones, Inc., In re, 17 Bankr. 12 14

Southern Electronics Co., In re, 23 Bankr. 348....10, 11, 12

Sunflower Oil Co. v. Wilson, 142 U.S. 312 15

Tucson Yellow Cab Co., In re, 27 Bankr. 621 3

Unishops, Inc., In re, 553 F.2d 30 14

United States v. Security Industrial Bank, No. 81-

OS On 17

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

II . 13

Statutes:

Bankruptcy Reform Act of 1978 (Bankruptcy

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

Chapter 3:

. —.1 14

11 U.S.C. 362 (b) (4ůh3t — 15

15

13

I T— —„»—

11 U.S.C. 865 (e) fů ))) =

Chapter 5:

11 U.S.C. 508

11 U.S.C. 507 sa

11 U.S.C, 50% (a0 ( —

3

3

2

Chapter 11 6, 15

12

National Labor Relations | et, Section 138

28 U.S.C. 188 (a) (5) —

Miscellaneous: Page

Bordewieck & Countryman, The Rejection of Col-

lective Bargaining Agreements by Chapter 11

Debtors, draft (to be published in American

Bankruptcy Law Journal, October 1983)........ 4, 5, 9-10

2 Collier on Bankruptcy (L. King 15th ed. 1983).... 15, 17

In the Supreme Court of the United States

OCTOBER TERM, 1983

No. 82-818

NATIONAL LABOR RELATIONS BOARD, PETITIONER

V.

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

No. 82-852

LOCAL 408, INTERNATIONAL BROTHERHOOD

OF TEAMSTERS, ETC., PETITIONER

V.

NATIONAL LABOR RELATIONS BOARD, ET AL.

ON WRITS OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE THIRD CIRCUIT

REPLY BRIEF FOR

THE NATIONAL LABOR RELATIONS BOARD

1. Respondent Bildisco contends (Br. 21) that

it’s Kevin Steel/REA Express stand-

a collective bargaining agreement

test adopted by the court below is more balanced be-

cause it not only gives recognition to the rights of

union employees under the national labor policy, but

also considers “the claims and interests of the debtor’s

other creditors and make[s] a reasoned determi-

nation that rejection of the labor contract will as-

sist in the achievement of a satisfactory reorgani-

zation.“ These contentions do not withstand analysis.

a. Bildisco’s suggestion that the Kevin Steel/REA

Express standard gives an unfair preference to em-

ployees represented by a union over other creditors

is wide of the mark. This case does not involve the

rights of bargaining unit employees as pre-petition

creditors vis-a-vis the rights of other pre-petition

creditors.’ Rather, the issue before the Court is the

nature of a debtor-in-possession’s obligations under

a collective bargaining agreement during the post-

petition period.

Contrary to Bildisco’s suggestion, the bankruptcy

laws themselves support the conclusion that the in-

terests of those who deal with the debtor-in-

possession during the post-petition period take prece-

In situations in which the employer has failed to adhere to

a collective bargaining agreement in the pre-petition period

(as was the case with Bildisco), employees in the bargaining

unit stand on no different footing than any other class of

creditors with respect to their pre-petition claims against the

employer. Section 507 (a) (3) of the Bankruptcy Code, 11

U.S.C. 507 (a) (3), accords third priority to wage claims up to

$2,000 for the 90-day period immediately prior to the filing of

the petition. The reorganization plan determines the extent to

which the pre-petition claims of both the unit employees and

all other creditors will be paid. Bildisco is simply wrong in

contending (Br. 21-22) that if a bankruf tey court fails to per-

mit rejection of a collective bargaining agreement unit em-

ployees (in contrast to all other classes of creditors) will

escape “unscathed.”

dence over the interests of pre-petition creditors.

This is in keeping with the very purpose of the

debtor-in-possession arrangement, which is to help the

business survive by enabling it to incur obligations

that will not be compromised by the debtor’s prior

financial difficulties. Thus, as this Court stated in

Reading Co. v. Brown, 391 U.S. 471, 475 (1968),

“the larger objective, common to arrangements, [is

that] of operating the debtor’s business with a view

to rehabilitating it.” Accordingly, the Bankruptcy

Code provides that first priority is given to expenses

of administration. See 11 U.S.C. 503, 507. And this

Court in Reading Co. v. Brown, supra, generously

interpreted such expenses, in recognition that those

who deal with the debtor-in-possession in the post-

petition period should not be required to sacrifice

their interests to the interests of pre-petition credi-

tors. The Court there held that claims for damages

resulting from the negligence of the receiver dur-

ing the post-petition period are expenses of admin-

istration entitled to priority. The Court explained

(id. at 482-483) :

[I]n considering whether those injured by the

operation of the business during an arrange-

ment should share equally with, or recover ahead

of, those for whose benefit the business is car-

ried on, the latter seems more natural and just.

Existing creditors are, to be sure, in a dilemma

not of their own making, but there is no obvious

reason why they should be allowed to attempt to

escape that dilemma at the risk of imposing it

on others equally innocent.

See also, e.g., In re Tucson Yellow Cab Co., 27

Bankr. 621, 623 (Bankr. 9th Cir. 1983) (employee

claims under the National Labor Relations Act may

4

not be ignored “merely in order to permit unsecured

creditors to obtain a satisfaction on their claims”) ;

In re Mammoth Mart, Inc., 536 F.2d 950, 954 (1st

Cir. 1976) (fairness requires that any claims in-

cident to the debtor-in-possession’s operation of the

business be paid before those of creditors for whose

benefit the continued operation of the business is

allowed).

Moreover, even the court below purported to recog-

nize (82-818 Pet. App. 12a-13a) that the accom-

modation of bankruptcy policy to the national labor

policy requires a higher standard for rejection of

a collective bargaining agreement than for rejec-

tion of other types of executory contracts. Because

a collective bargaining agreement may not be set

aside merely because it would benefit the estate, em-

ployees covered by such an agreement receive more

protection than creditors under normal commercial

contracts. As a result, creditors with accrued claims

may have to make sacrifices that employees covered

by a collective bargaining agreement are not required

to make. But in view of the need to accommodate the

objectives of national labor policy, that result cannot

be characterized as inconsistent with congressional

intent. See Bordewieck & Countryman, The Rejection

of Collective Bargaining Agreements by Chapter 11

Debtors, draft at 21-23 (to be published in the

October 1983 issue of American Bankruptcy Law

Journal) (hereinafter “Bordewieck and Country-

man“).

b. The Kevin Steel, REA Express standard (de-

scribed in our opening brief at pages 23-24) ensures

We are lodging copies of the draft article by Bordewieck

and Countryman with the Court and providing copies to coun-

sel for the parties and amici.

5

that a collective bargaining agreement will be set

aside only for reasons of real economic necessity, i. e.,

when it is demonstrably necessary to accomplish the

bankruptcy policy goal of creating conditions that

will forestall collapse of the business. The standard

does not ignore the interests of either creditors or

others who deal with the debtor-in-possession during

the arrangement. If the debtor-in-possession is able

to operate successfully under a collective bargaining

agreement, creditors will be paid under the reorgan-

ization plan ultimately approved by the bankruptcy

court. If the debtor-in-possession cannot operate suc-

cessfully under the collective agreement, it may apply

for rejection of the agreement at any point up to the

time of adoption of the plan.

Moreover, the Kevin Steel/REA Express standard

does not require maximum sacrifices by nonunion

employees or others with whom the debtor-in-posses-

sion deals as a prerequisite to rejection of a collective

8 Bildisco repeats the assertion, accepted by the court below

(82-818 Pet. App. 14a-15a), that the Kevin Steel/REA Ex-

press standard is inadequate because it is difficult to predict at

an early point whether a business will fail absent rejection of

a collective bargaining agreement. Bildisco Br. 24-25. We ex-

plained in our opening brief (at 26) that this concern is en-

titled to little weight, since a debtor-in-possession may apply

for rejection at any point during the proceeding, i.e., whenever

it becomes possible to make the necessary showing. As Borde-

wieck and Countryman point out, the difficulty of predicting

success or failure at an early stage weighs in favor of a more

stringent test for rejection of a collective bargaining agree-

ment. “Permitting a bankruptcy court to reject a collective

bargaining agreement because it cannot tell whether or not

the reorganization is going to succeed effectively performs the

delicate balancing of conflicting statutory objectives by plac-

ing a cinder block on the Bankruptcy Code side of the scale.”

Bordewieck & Countryman, supra, at 26.

6

bargaining agreement.‘ A debtor-in-possession need

not make a showing that salaries and wages of man-

agerial personnel or non-represented employees have

been slashed to the bone or that the business would be

crippled by cost-cutting measures. However, in cir-

cumstances in which labor costs of represented em-

Thus, the cases that have applied the Kevin Steel/REA Ex-

press standard and that were cited in our opening brief (at 24

n.13) did not involve a refusal to allow rejection on the ground

that other creditors had not made the utmost sacrifice. Rather,

the courts in those cases generally found that altering the

terms of the collective bargaining agreement would not make

the difference between success or failure. See, e.g., In re

Connecticut Celery Co., 106 L.R.R.M. (BNA) 2847, 2852

(Bankr. D. Conn. 1980) (costs of union benefits were only

three percent of operating expenses; submission by the debtor

and confirmation of a plan that did not include rejection of

collective bargaining agreement amounted to a concession that

the requirements of the plan could be met without rejection) ;

In re Miles Machinery Co., No. 81-00388 (Bankr. E. D. Mich.

June 17, 1982), slip op. 7-8 (factors such as bidding and pric-

ing mechanisms, design and engineering costs, and number of

customers, rather than labor costs, were identified as key to

debtor’s survival). In In re David A. Rosow, Inc., 9 Bankr.

190 (Bankr. D. Conn. 1981), relied on by Amicus Curiae

Chamber of Commerce (Br. 7-8), the court did not refuse re-

jection because further sacrifices could be extracted from the

nonunion workforce. Rather, the court noted that rejection

of the collective agreement would effect a savings of $636.17

per week and that operating expenses amounted to $100,000

per week and concluded that savings resulting from rejection

would be de minimis. The court observed that the debtor had

cut the wages and benefits of its 125 nonunion employees prior

to filing its Chapter 11 petition, but rejected the debtor’s argu-

ment that the wages of the 12 union employees must therefore

be cut in a comparable manner. In addition, the court ob-

served that no adjustment had been proposed in the debtor’s

rental payments of $15,000 per month to its sole stockholders.

Id. at 193 n.6.

7

ployees do not constitute the overwhelming share of

operating expenses, it is entirely appropriate to assess

whether a successful reorganization could be accom-

plished by measures other than rejection of a collec-

tive bargaining agreement. The Kevin Steel/REA

Express standard accordingly does require the bank-

ruptey court to determine whether the debtor-in-

possession has taken whatever steps a reasonably

prudent person would take to ensure viability before

allowing rejection of the collective agreement. See,

e.g., In re Blue Ribbon Transportation Co., BK No.

8300362 (Bankr. D. R. I. June 24, 1983) (court

required debtor to cut excessive management salaries

and cease maintaining seven automobiles for the per-

sonal use of management and their families as a con-

dition to allowing rejection of the collective agree-

ment).

It may well be that application of the Kevin Steel/

REA Express standard results in securing the bene-

fits of a collective bargaining agreement for employ-

ees in the bargaining unit, while others who work for,

or deal with, the debtor-in-possession during the post-

petition period are not similarly protected. But con-

trary to the contentions of Bildisco (Br. 14-16) and

Amicus Curiae Chamber of Commerce (Br. 9-10),

that result flows from the national labor policy foster-

ing collective bargaining, not from any policy of

favoring employees represented by a union over other

employees. It is clear that the National Labor Rela-

tions Act accords rights and protections to employees

under collective bargaining agreements that other

employees may not have. See NLRB v. Jones &

Laughlin Steel Corp., 301 U.S. 1, 33-34, 42 (1937).

It is a violation of the Act for an employer uni-

laterally to abrogate or modify a collective agreement,

even if economic hardship dictates such a course. See

8

our opening brief at 16-18. Thus, an employer that

has not filed a bankruptcy petition, but is suffering

financial difficulties, may be able to change at will

the terms of employment for employees not covered

by a collective agreement, but it could not do so in

the case of employees covered by such an agreement.

This principle furthers the basic purpose of the Act—

promotion of collective bargaining in order to “fa-

cilitate agreement in place of economic warfare.”

Allied Chemical Workers Local Union No. 1 v.

Pittsburgh Plate Glass Co., 404 U.S. 157, 187 (1971).

“Enforcement of the obligation to bargain collectively

is crucia] to the statutory scheme.” NLRB v. Ameri-

can National Insurance Co., 343 US. 395, 402

(1952). See also First National Maintenance Corp.

v. NLRB, 452 U.S. 666, 674 (1981).

This policy deserves weight in the context of bank-

ruptey proceedings, no less than in other contexts.

The fact that bankruptcy proceedings are underway

does not justify stripping employees represented by

a union of the special statutory protection afforded to

their collective bargaining rights merely because such

protection is not enjoyed by other employees.“

ce. The test adopted by the court below not only

elevates the interests of pre-petition creditors in a

manner not justified by bankruptcy policy; it also

accords insufficient weight to the national labor policy

The assertion of Amicus Curiae Chamber of Commerce

(Br. 9) that “the government should remain ‘wholly neutral’

as to whether or not employees should unionize and bargain

collectively” is overstated. The Act is neutral with respect to

whether employees should unionize. But once employees have

chosen to do so, the Act is not neutral with regard to the ob-

ligation of employers to bargain with the employees’ chosen

representative and to refrain from destabilizing contractual

relations.

*

9

by permitting rejection of collective bargaining agree-

ments far too readily. Under the Third Circuit’s

test the bankruptcy court is to balance equities and

make a “reasoned determination” that rejection will

assist the debtor-in-possession in achieving a satis-

factory reorganization (82-818 Pet. App. 17a). Such

a showing no doubt could be made in most cases

merely on the basis that it would be less costly or

burdensome for an employer to operate without ad-

hering to the collective agreement.

Recent cases indicate that bankruptcy courts that

apply a test less stringent than the Kevin Steel/REA

Express standard are inclined to grant rejection on

what appear to be insubstantial grounds. For ex-

ample, the court in In re Reserve Roofing Florida,

Inc., 21 Bankr. 96 (Bankr. M.D. Fla. 1982), in

granting rejection under a balancing of the equities

test, found it significant that the collective bargain-

ing agreement required the debtor to “incur sig-

nificant expenses which are not necessary to the per-

formance of [its roofing] contracts.” Id. at 98. As

Bordewieck and Countryman note, consideration of

whether a collective bargaining agreement is “neces-

sary” to the debtor’s operations flies in the face of

the national labor policy:

Given the NLRA and the policies underlying it,

expenses stemming from a collective bargaining

agreement advantageous to the unior are indeed

a “necessary” part of the business operation,

whether the employer likes it or not. The fact

that the union has struck a good deal does not

mean that the costs of the collective bargaining

agreement are not “necessary” because in an ut-

terly non-union world cheaper labor would be

available. The court’s conclusion [in Reserve

Roofing Florida] seems premised on the assump-

10

tion that the non-union world furnishes the

paradigm against which a debtor’s position is

to be compared. Given the fundamental labor

policy that collective bargaining is the preferred

method of employer/employee relations, such an

assumption is untenable.

Bordewieck & Countryman, supra, at 40-41. See also

In re Ateco Equipment, Inc., 18 Bankr. 915, 916-

917 (Bankr. W.D. Pa. 1982), in which the court al-

lowed rejection because “savings” of $2,250 per

month could be realized by not paying the contractual

wage rate and because workers with seniority could

be laid off “more easily.”

The case of In re Southern Electronics Co., 23

Bankr. 348 (Bankr. E.D. Tenn. 1982), illustrates

well that in practice the application of a “flexible”

test does not afford protection to the interests of the

national labor policy. The bankruptey court there

allowed rejection of the collective bargaining agree-

ment, expressly applying the test articulated by the

court below. The court recognized that there was no

contention or evidence that the economic terms of

the agreement were “too costly to be sustained by the

debtor” or that they had contributed to the bank-

ruptey. Id. at 359. However, the court found it

significant that the debtor-in-possession wanted to be

able to escape the seniority provisions of the agree-

ment for the alleged purpose of improving produc-

tion. The evidence indicated that the debtor-in-

possession had never established objective production

criteria, that the union made clear that it was willing

to bargain about production problems and to permit

discharge of employees who could be shown to be un-

productive, and that the debtor-in-possession had not

provided evidence of individual production perform-

11

ance to either the union or the bankruptey court. Id.

at 359-360.“ The court nevertheless coneluded that

use of the contractual grievance pro tres to re-

solve contentions that particular employees were un-

productive would be “burdensome.” Id. at 361.

The debtor-in-possession in Southern Electronics

did not wait for court approval of rejection before

disregarding the collective bargaining agreement. In-

itially it refused to bargain with the union. 23 Bankr.

at 353. Soon after the bankruptcy court ordered the

debtor-in-possession to abide by the collective bar-

gaining agreement pending the court’s determination

whether to permit rejection, the debtor-in-possession

discharged 14 allegedly underproductive employees

and replaced them (but not in order of seniority)

with 19 former employees who had been laid off.

Id. at 354, 359. The debtor-in-possession did not

notify the union of its proposal to reject the collective

bargaining agreement until the court directed it to

do so more than a month after the proposal was sub-

mitted. Id. at 362. The president of the debtor-in-

possession had written to the union that his “main

desire [was] to operate in a union free environ-

ment” and that “a urion free environment is best

for my style of management.” Id. at 362-362. De-

spite the indications of bad faith on the part of the

debtor-in-possession, the court concluded that rejec-

tion was proper on the ground that the president of

the debtor-in-possession had insisted on making his

earlier purchase of the capital stock of the company

conditional on rejection of the collective bargaining

*In addition, the evidence indicated that the debtor’s diffi-

culties were due not only to poor productivity, but also to lack

of effective management. 23 Bankr. at 363.

12

agreement. Id. at 361, 363. The result in Southern

Electronics can hardly be said to reflect recognition

of the national labor policy.

2. Bildisco also contends that it did not violate

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

29 U.S.C. 158(a) (5), by its initiation or continuance

of unilateral changes in the collective bargaining

agreement during the post-petition period. It asserts

(Br. 28, 37) that it was entitled to make such changes

because, after filing a bankruptcy petition, a debtor-

in-possession is not bound to comply with the debtor’s

executory contracts unless and until they are affirma-

tively adopted. Applicable precedent does not support

that contention.

As we explained in our opening brief (at 47), it

is well established that a debtor’s contractual obliga-

tions continue to exist in the period following the

filing of a reorganization petition. See also, e.g., In

re Innkeepers of New Castle, Inc., 671 F.2d 221, 222,

226 (7th Cir. 1982), cert. denied, No. 82-221 (Oct.

12, 1982) (rejecting the contention that the non-

debtor party to an executory contract was entitled

only to a reasonable fee rather than to the contractual

terms where the contract was neither assumed nor

rejected until after the non-debtor party had per-

formed his part of the contract); Federal’s, Ine. v.

Edmonton Investment Co., 555 F.2d 577, 578-579

(6th Cir. 1977) (confirmation of reorganization plan

did not discharge an executory contract that was

not rejected). As the court explained in Federal’s,

555 F.2d at 579, “this rule is consistent with the

purpose of Chapter XI of enabling debtors to continue

their business under court supervision.”

Indeed, if Bildisco were correct that the mere filing

of a reorganization petition allows a debtor to stop

adhering to the terms of an executory contract, then

13

a non-debtor party to the contract similarly would be

entitled to cease dealing with the debtor-in-possession.

This result would be inconsistent with the scheme of

the Bankruptcy Code, which expressly precludes

modification or termination of an executory contract

merely because a petition has been filed, a trustee

has been appointed, or the financial condition of the

debtor is poor. 11 U.S.C. 365 (e) (1). See also In re

Alfar Dairy, Inc., 458 F.2d 1258, 1261 (5th Cir.),

cert. denied, 409 U.S. 1048 (1972) (“[a]ny other

rule [than that executory contracts remain in effect]

could result in chaos and injustice in bankruptcy pro-

ceedings”). Accordingly, the courts have held that

collective bargaining agreements remain in effect

during the post-petition period until rejected. In re

W. T. Grant Co., 620 F.2d 319, 321 (2d Cir.), cert.

denied, 446 U.S. 983 (1980); In re Public Ledger,

Inc., 161 F.2d 762, 767 (3d Cir. 1947) (rejecting ap-

plication of doctrine of “experimental assumption”

and stating that “[t]he trustees could not seek and

accept the benefits of the employment under the

Section 365 (e) (1) of the Bankruptcy Code, 11 U.S.C.

365 (e) (1), provides:

Notwithstanding a provision in an executory contract

or unexpired lease, or in applicable law, an executory con-

tract or unexpired lease of the debtor may not be termi-

nated or modified, and any right or obligation under such

contract or lease may not be terminated or modified, at

any time after the commencement of the case solely be-

cause of a provision in such contract or lease that is con-

ditioned on—

(A) the insolvency or financial condition of the

debtor at any time before the closing of the case;

(B) the commencement of a case under this title; or

(C) the appointment of or taking possession by a

trustee in a case under this title or a custodian before

such commencement.

14

favorable terms of the contract without for the time

of enjoying them, accepting and yielding to terms

deemed burdensome”) ; and see Jn re Unishops, Inc.,

553 F.2d 305, 308 (2d Cir. 1977) ; In re Smith Jones,

Inc., 17 Bankr. 126, 128 (Bankr. D. Minn. 1981).°

Bildisco urges (Br. 28) that it was not required

to adhere to the collective bargaining agreement in

the post-petition period because “[t]he trustee or

debtor in possession is afforded [a] breathing spell

for the express purpose of protecting the bankrupt’s

estate from claims arising from a failure to perform

subsequent to the date of filing.” It is true that the

automatic stay provision of the Code, 11 U.S.C. 362,

gives the debtor a breathing spell from claims of his

creditors. However, the protection afforded to a

debtor-in-possession is from actions taken by the non-

debtor party arising from the debtor’s failure to

honor pre-petition claims, not from the debtor-in-

possession’s own failure to honor claims arising dur-

ing the period of arrangement. “Claims or actions

which arise after the commencement of the case are

In Local Joint Executive Board v. Hotel Circle, Inc., 613

F.2d 210, 216-217 (9th Cir. 1980), the court held that a trustee

could not affirmatively assume a collective bargaining agree-

ment, so that the debtor’s estate would be bound in the future,

without the express permission of the bankruptcy court. How-

ever, the alleged assumption of the agreement in that case did

not involve mere adherence to the terms of a contract; rather

it involved the trustee’s entry into negotiations for modifica-

tion and extension of the agreement and adoption of the re-

sulting wage increase and extension agreed on by a multi-

employer group. The court did not indicate that the trustee

would not be bound by the terms of an existing executory con-

tract during the post-petition, pre-rejection period. Rather,

its discussion suggests that the trustee would be so bound (id.

at 217 n.4).

15

not included since such a stay would discc rage

others from dealing with the trustee.” 2 Collier on

Bankruptcy J 362.04[1], at 362-28 (L. King 15th

ed. 1983).°

The cases Bildisco relies on (Br. 28) do not sup-

port its contention that it was entitled to suspend the

terms of the collective bargaining agreement during

the post-petition, pre-rejection period. In Sunflower

Oil Co. v. Wilson, 142 U.S. 313, 322 (1892), and In

re Rochester Shipbuilding Corp., 32 F.Supp. 98

(W.D.N.Y. 1940), the courts rejected contentions of

non-debtor parties that a receiver could be forced to

continue a contract on the basis that he had not taken

immediate steps to disaffirm it. The courts in those

cases did not suggest that a receiver could disregard

obligations under the contract during the period prior

to rejection. Indeed, the court in Sunflower Oil em-

phasized that the receiver, upon taking possession of

the property, would pay “the stipulated rental for it

so long as he used it.” 142 U.S. at 322. In In re

McCormick Lumber & Mfg. Corp., 144 F.Supp. 804

(D.Ore. 1956), the court rejected the contention of a

conditional sales vendor that it was entitled to re-

claim certain machinery on the ground that the

trustee’s inaction within 60 days of adjudication of

Moreover, Bildisco clearly is not entitled to a “breathing

spell“ from enforcement of obligations determined in Board

unfair labor practice proceedings. Section 362 (b) (4) and (5)

of the Bankruptcy Code, 11 U.S.C. 362 (b) (4) and (5), ex-

pressly exempt from the scope of the automatic stay provision

governmental actions to enforce police or regulatory power.”

See Ahrens Aircraft, Inc. v. NLRB, 703 F.2d 23, 24 (Ist Cir.

1983) ; NLRB v. Evans Plumbing Co., 639 F.2d 291, 292-293

(5th Cir. 1981). Accordingly, Bildisco’s Chapter 11 petition

did not operate to stay the unfair labor practice proceedings as

to either post-petition or pre-petition claims.

16

bankruptey amounted to rejection. However, the

court affirmed the referee’s award to the vendor of

the balance due on the conditional sales contract. In

Pacific Western Oil Co. v. McDuffie, 69 F.2d 208, 213

(9th Cir.), cert. denied, 293 U.S. 568 (1934), the

court rejected the contention that a claim for oil de-

livered under an executory contract before the incep-

tion of a receivership could be considered an expense

of administration because the parties had continued

to perform under the contract following inception of

the receivership. In Fletcher v. Surprise (In re

Northern Indiana Oil Co.), 180 F.2d 669, 675-676

(7th Cir.), cert. denied, 340 U.S. 824 (1950), the

court held that the trustee did not obtain title to a

lease because he failed to assume the lease following

his appointment. The issue before the court was

whether the trustee was entitled to recover property

associated with the lease, not whether he was re-

quired to adhere to the terms of the lease. In each

of these cases, the comments of the court concerning

a “breathing spell” for the receiver do not suggest

that the court believed a receiver could ignore its

obligations under a contract in the period prior to

rejection. Rather, the courts were concerned with the

effect of the receiver’s failure expressly to assume

or reject a contract in the period following the in-

ception of the receivership.

Other cases Bildisco cites (Br. 38) are inapposite

because they rest on special principles relevant to

property leases. For example, Philadelphia Co. v.

Dipple, 312 U.S. 168 (1941), concerned the tax

liability of trustees who operated a business using

property subject to leases and operating agreements.

The court noted in dictum (id. at 174) that prior to

affirmance or disaffirmance of such leases and agree-

17

ments the court could order payment of a reasonable

sum for use and occupation. Bildisco relies on these

cases for the proposition that “the right to receive

compensation for benefits conferred [by a contract

not adopted by the debtor-in-possession] is not based

upon the debtor in possession’s contractual liabilities

but instead is an equitable right based upon the rea-

sonable value of the benefits conferred” (Br. 38).

In fact, the cited cases appear to be based on the

principle that, because the debtor-in-possession does

not take title to a lease until it has affirmatively as-

sumed it, its obligation to pay is based on use rather

than ownership. See 2 Collier on Bankruptcy, supra,

365.03, at 365-24 to 365-25. No such question of

assumption of title arises in the case of an ordinary

contract or a collective bargaining agreement.“ The

cases cited at pages 12-14, supra, and in our opening

brief (at page 47) make clear that in such cases con-

10 Cf. United States v. Security Industrial Bank, No. 81-184

(Nov. 30, 1982), slip op. 5 (concluding that Bankruptcy Code

does not authorize retroactive destruction of property rights,

explaining that “our cases recognize, as did the common law,

that the contractual right of a secured creditor to obtain re-

payment of his debt may be quite different in legal contempla-

tion from the property right of the same creditor in the

collateral’’).

In re Price Chopper Supermarkets, Inc., 19 Bankr. 462, 467

(Bankr. S.D. Cal. 1982), appears to apply the lease cases to

rejection of a collective bargaining agreement, stating that an

entity that provides services during the reorganization period

is entitled to compensation based on the fair market value of

the services provided to the estate. To the extent Price Chop-

per Supermarkets suggests that an employer is not bound to

adhere to the terms of a collective bargaining agreement in

the post-petition, pre-rejection period, we believe it was

wrongly decided.

18

tractual obligations continue to exist in the post-

petition, pre-rejection period.“

4 In any event, even if Bildisco were correct that it was not

bound by the terms of the collective bargaining agreement

during the post-petition, pre-rejection period, it does not fol-

low that a unilateral change in working conditions could not

be found to be an unfair labor practice. Bildisco does not

challenge the proposition that, as debtor-in-possession, it was

required to bargain with the Union about the bargaining unit

employees’ terms and conditions of employment. See Bildisco

Br. 23, 32, 40. As Amicus Curiae American Federation of

Labor—Congress of Industrial Organizations points out (Br.

14-24), federal statutes that regulate the conduct of business

are not suspended merely because a business is being con-

ducted by a debtor-in-possession or trustee under the super-

vision of a bankruptcy court. Nothing in the policy of the

bankruptcy laws relieves Bildisco of its obligation under the

National Labor Relations Act to bargain during the post-

petition period. Accordingly, the Board could find Bildisco’s

unilateral action to be a violation of its duty to bargain with

the Union even if the contract were in a state of suspension.

As Amicus Curiae Chamber of Commerce appears to concede

(Br. 3-4 n.4), claims based on unfair labor practices com-

mitted by the debtor-in-possession in the post-petition period

are accorded a first priority as administrative claims. See also

our opening brief at 49 n.38.

their services unless the contract is assumed. But whether or

not the contract is binding on Bildisco during that period, the

Board could properly order Bildisco to pay the previously

19

For the foregoing reasons, and the reasons stated

in our opening brief, the judgment of the court of

appeals should be reversed.

Respectfully submitted.

REx E. LEE

Solicitor General

WILLIAM A. LUBBERS

General Counsel

National Labor Relations Board

SEPTEMBER 1983

® ©. 8. coveenwest reseriss orrice, 1903 4% «8s