Petition — Local 408, International Brotherhood of Teamsters v. National Labor Relations Board, 103 S. Ct. 2425 (1983) (No. 82-852)
Supreme Court brief1983
Ask Donna
What actually matters in this document.
Text
‘rite.
K
Supreme Court of the Unite
Ocroser Term, 1982
LOCAL 408, INTERNATIONAL BROTHERHOOD OF
TEAMSTERS, CHAUFFEURS, WAREHOUSEMEN
AND HELPERS OF AMERICA,
Petitioner,
NATIONAL LABOR RELATIONS BOARD and
BILDISCO and BILDISCO, DEBTORS IN POSSESSION,
Respondents.
PETITION OF LOCAL UNION NO. 408, 1.B.T., FOR A
WRIT OF CERTIORARI TO THE UNITED STATES
COURT OF APPEALS FOR THE THIRD CIRCUIT
James R. Zazzaut,
Counsel of Record for Petitioner,
Local 408, 1.B.T.,
Gateway I,
Newark, New Jersey 07102.
(201) 623-1822
Questions Presented
1. Did the Court of Appeals err in holding that a debtor
in possession of a reorganized business may obtain re-
jection of a collective bargaining agreement under 11
U.S.C. §365(a) of the Bankruptey Code without requir-
ing that the debtor in possession first comply with the
bargaining requirement for mid-term contract modifi-
cation contained in 29 U.S.C. §158(d) of the National
Labor Relations Act prior to obtaining rejection under
the Code?
2. Did the Court of Appeals err in ruling that a debtor in
possession, who petitions for rejection of a collective
bargaining agreement eight months after the debtor
had filed for bankruptcy, is a new juridical entity which
is not bound by the debtor’s labor contract and not
bound by the requirements of the labor laws during the
period prior to obtaining rejection, even where, as here,
all of the workers employed by the debtor in possession
in the relevant unit had been employed by the debtor
company and were covered by the collective bargaining
agreement in effect between the debtor company and the
Union?
3. Did the Court of Appeals err in ruling that a petition to
reject a labor contract under 11 U.S.C. §365(a) of the
Bankruptcy Code may be granted merely after a weigh-
ing of the equities even where rejection is not necessary
for the continued operation of the company and where
the standard used by this Court of Appeals directly
conflicts with the more stringent test established by the
Second Cireuit and followed by the lower courts?
TABLE OF CONTENTS
I NINN 0 csaiahinsinnsniensithnninsnpenanascsianidenitaibibees
ey ee
Ee ee TT TD
JURISDICTION
Srarures Iwvo.ven ..............................
STATEMENT OF THE CASE OO
ARGUMENT:
Point I—The decision of the Court of Appeals
that a debtor in possession may reject a labor
contract under 11 U.S.C. 4365(a) of the Bank-
ruptey Code without requiring that the debtor
in possession first comply with the bargaining
requirement for mid-term co: tract modification
contained in 29 U.S.C. §158(d) of the National
Labor Relations Act should be reviewed by
this Court because it presents a significant
issue of reconciling a conflict between two
fundamental statutory schemes and because the
Court of Appeals’ decision constitutes an im-
proper analysis and treatment of these two
statutes
PAGE
TABLE OF CONTENTS
Point II—The decision of the Court of Appeals
that a labor contract may be rejected under
11 U.S.C. §365(a) of the Bankruptcy Code
merely upon a weighing of the equities should
be reviewed by this Court because it directly
conflicts with the standard developed by the
Second Cireuit and followed by the lower
courts and because the standard adopted sub
judice is unnecessarily destructive of workers’
pension, welfare and seniority rights ..............
ConcLUSION
APPENDIX:
A—Opinion of the United States Court of Ap-
peals for the Third Circuit
B—Judgment of the United States Court of
Appeals for the Third Circuit
C—Opinion of the United States District Court
for the District of New Jersey
D—Judgment of the United States District
Court for the District of New Jersey ........
PAGE
la
26a
iv TABLE OF AUTHORITIES
PAGB
Table of Authorities
Cases Cited
Alan Wood Steel Co., In re, 449 F. Supp. 165 (E.D.
Pa. 1978), appeal dismissed, 595 F.2d 1211 (3d
einer ee Na OR ae OR 26
Allied Supermarkets, Inc., In re, 6 Bankr. Rptr. 968
(E.D. Mich. 1980) ie 21, 26
Allied Technology, Inc., Matter of, 8 Bankr. Rptr. 366
(S.D. Ohio 1980) saviecibeiiiiititiiililiiiiiains 26
Bohack Corp. v. Local Union No. 807, 431 F. Supp.
646 (E.D. N.Y.), aff'd 567 F.2d (2 Cir. 1977), cert.
EN eer ee 26
BRAC v. REA Express, Inc., 523 F.2d 164 (2d Cir.),
cert. den., 423 U.S. 1017 (1975) ~....0000.. 5, 18, 24-29
Brada Miller Freight Co., Matter of, 16 Bankr. Rptr.
eee 26
Busic v. United States, 446 U.S. 398 (1980) -............ 14
C & S Industries, Inc., 62 L.R.R.M. (BNA) 1043, 158
ee 10, 13
Connecticut Celery Co., In the Matter of the, 106
L.R.R.M. (BNA) 2847 (Bankr. D. Conn. 1981) ...... 26
David'A. Rosow, Inc., In re, 9 Bankr. Rptr. 190
(Bankr. i SI. EEE? ‘cetnaseenbnmmeenanenieninnintsl 15, 16, 26
Dunham-Bush, Inc., 111 L.R.R.M. saad 1389, 264
N.L.R.B. 1063 (1973) 10
Howard Johnson Co. v. Hotel hsteieen 417 US.
Be CIE ntcinenstictaisneecennennssiuissiintbaitaianadlinien ..16, 19
John Wiley & Sons v. Livingston, 376 U.S. 543
(1963) 12
TABLE OF AUTHORITIES v
Johnson v. England, 356 F.2d 44 (9th Cir. 1966) ...... 20
Kiefer-Stewart Company v. Joseph E. Seagram &
Sons, Inc., 340 U.S. 211 (1951) 10
Local Joint Executive Board v. Hotel Circle, Inc.,
612 F.2d 210 (9th Cir. 1980) 26
Local Union No, 455 v. Kevin Steel Products Inc., 519
F 2d 698 (2d Cir. 1975) 4, 5, 10, 12, 16, 18,
19, 22, 25, 26, 28
Mastro Plastics Corp. v. NLRB, 350 U.S. 270 (1956) ..14, 15
Meyer v. Commissioner, 383 F. 2d 883 (8th Cir. 1967) 13
Morton v. Mancari, 417 U.S. 535 (1974) 14
NLRB v. Baldwin Locomotive Works, 128 F.2d 39
(3d Cir. 1942) 20
NLRB vy. Burns International Security Services, 406
U.S. 272 (1972) 16, 19, 22, 23
NLRB vy. Coal Creek Coal Company, 204 F.2d 579
(10th Cir. 1953) 20
Nathanson v. NLRB, 344 U.S. 25 (1952) 17
Oak Cliff-Golman Baking Co., 85 L.R.R.M. (BNA)
1035, 207 N.L.R.B. 1063 (1973) 10
Penn Fruit Co., In re, 92 L.R.R.M. (BNA) 3548 (E.D.
Pa. 1976) 26
Petrusch v. Teamster Local 317, 667 F.2d 297 (2d
Cir. 1981) 21
Preiser v. Rodriguez, 411 U.S. 475 (1973) ................... 14
Southport Petroleum Company v. NLRB, 315 U.S.
100 (1942) 20
vi TABLE OF AUTHORITIES
PaGE
Studio Eight Lighting, Inc. In re, 91 L.R.R.M.
(BNA) 2429 (E.D.N.Y. 1976) ..... - 26
Teamster Union Local 20 v. Morton, 377 U.S. 252
(1964) ll
Third Avenue Transit Corp., In re, 192 F.2d 971
(2d Cir. 1951) 20
Truck Drivers Local 807 v. Bohack Corp., 541 F.2d
312 (2d Cir. 1976), aff'd per curiam after remand,
567 F.2d 237 (2d Cir. 1977), cert. den., 439 U.S. 825
(1978) 22
Unishops, In re, 543 F.2d 1017 (2d Cir. 1976) .......... 22
United Steelworkers v. Warrior & Gulf Nav. Co.,
CE Ce ll
Statutes Cited
Railway Labor Act 4
11 U.S.C. (Bankruptcy Code) :
Sees. 101-1330 7
See. 205(n) 18
I 24
See. 507(a) (3) (4) 12
Sec. 365 17
Sec. 365(a) ....... i, 1-3, 5, 7-10, 12-15, 17-19, 21-24, 27, 28
See. 365(g) 21
See. 1107 3
Sec. 1167 4, 17,18
TABLE OF AUTHORITIES
PAGE
28 U.S.C.:
See. 1254(1) 1
See. 1291 1
Sec. 1334 1
Sec. 1471 1
25 U.S.C. (National Labor Relations Act):
See. 8(d) 5, 9, 10, 13-15, 17-19, 22-24, 28
See. 101 20
Sees. 151-169 1,17
See. 152(1) 10
See. 152(2) 10
Sec. 158(a) (5) 10
Sec. 158(d) i, 1, 7, 8,10
29 U.S.C. (Norris-LaGuardia Act):
Sec. 101 20
Other Authorities Cited
Article, New York Times, Sept. 30, 1982, p.1, col. 2 8
2 Collier on Bankruptcy (15th ed. 1981) :
p. 365-11, par. 365.01(2) 14, 16
76 Cong. Ree. 2927 (1933) » =
Countryman, Executory Contracts in Bankruptey:
Part II, 58 Minn. L. Rev. (1974):
479, 489 21
Viii TABLE OF AUTHORITIES
LaPenna, Bankruptey and Collective Bargaining
Agreement, 29 N.Y.U. Lab. Conf. (1976) :
169, 172 21
Note, Bankruptcy And The Rejection of Collective
Bargaining Agreements, 51 Notre Dame Lawyer
(1976) :
819, 827 18
Note, Bankruptcy Law—Labor Law—Rejection of
Collective Bargaining Agreements As Executory
Contracts in Bankruptcy, 22 Wayne L. Rev. (1975):
165, 173 21
176 25
NO.
Supreme Court of the United States
Octroser Term, 1982
=
_
LOCAL 408, INTERNATIONAL BROTHERHOOD OF
TEAMSTERS, CHAUFFEURS, WAREHOUSEMEN
AND HELPERS OF AMERICA,
Petitioner,
vs.
NATIONAL LABOR RELATIONS BOARD and
BILDISCO and BILDISCO, DEBTORS IN POSSESSION,
Respondents.
+
PETITION OF LOCAL UNION NO. 408, 1.B.T., FOR A
WRIT OF CERTIORARI TO THE UNITED STATES
COURT OF APPEALS FOR THE THIRD CIRCUIT
Opinions Below
The opinion for the Court of Appeals for the Third Cir-
cuit, entered on June 17, 1982, is reported at 682 F.2d 72
(3d Cir. 1982) and is appended to this petition (la to 25a).
The opinion of the District Court for the District of New
Jersey was rendered on May 6, 1981, is unreported, and
is appended to this petition (28a to 34a). The decision
of the Bankruptcy Court was rendered on January 5, 1981,
and is unreported.
Jurisdiction
Jurisdiction of this Court is conferred by 28 U.S.C. $1254
(1); that of the Court of Appeals by 28 U.S.C. $1291; that
of the District Court by 28 U.S.C. $1334; and that of the
Bankruptcy Court by 28 U.S.C. $1471.
Statutes Involved
The statutory provisions involved are the National Labor
Relations Act, 29 U.S.C. §151-169 (1976), in particular 29
U.S.C. §158(d), and the Bankruptcy Code, 11 U.S.C. §365
(a).
Statement of the Case
By this petition the petitioner, Local Union No. 408, In-
ternational Brotherhood of Teamsters, Chauffeurs, Ware-
housemen and Helpers of America, seeks the Court’s re-
view of a decision of the Court of Appeals for the Third
Cireuit which vacated the decision rendered by the Dis-
trict Court and remanded the matter to the District Court
for further proceedings in conformity with the opinion of
the Court of Appeals.* The petitioner does not contest or
*It should be noted that this case (Court of Appeals No. 81-
2140), involving an appeal from decisions below of the Bankruptcy,
District and Circuit Courts arising out of the rejection of a labor
contract, was consolidated in the Court of Appeals with an enforce-
ment proceeding brought by the National Labor Relations Board
(Footnote continued on following page)
complain of the Court of Appeals’ determination of facts
in the bankruptcy case or of its reversal and remand of
the bankruptcy case. Rather, the petitioner submits that
the Court of Appeals erred substantially in its legal analy-
sis and legal conclusions and in the standard of law it in-
structed the lower courts to apply on remand.
This petition arises out of a motion made in December
1980 by respondent Bildisco, Debtor in Possession, pursu-
ant to 11 U.S.C. 4365(a), to reject a collective bargaining
agreement signed by Bildisco and the petitioner. Bildisco
is a New Jersey partnership engaged in selling and dis-
tributing building supplies. Bildisco and the petitioner had
been party to a series of collective bargaining agreements,
the most recent of which was effective from May 1, 1979 to
Apri) 30, 1982. Bildiseo was not a party to any other labor
contracts. Bildisco had at one time employed 18 persons in
the unit covered by the collective bargaining agreement in
effect with the petitioner Union. This number decreased to
3 employees by the date of the petition to reject the collec-
tive bargaining agreement. All of the workers employed
by the Debtor in Possession in the relevant work unit had
been employees of the debtor company in that unit and had
been covered by the collective bargaining agreement at
issue. Several of the Union employees terminated by Bil-
diseo and the Debtor in Possession had nearly 20 years of
service to the company.
Commencing in January 1980 Bildiseo ceased making
pension and welfare payments to the applicable trust funds
on behalf of the employees covered by the collective bar-
gaining agreement and also failed to forward to the Union
the dues the company was withholding from the employees’
(Footnote continued from preceding page)
(Court of Appeals No. 81-2238). The Board and this Union
intervened in each other’s cases. The Board is also petitioning for
a writ of certiorari. For purposes of clarity, where needed, the
Board’s case will be referred to as the “enforcement” case and the
Union's case will be referred to as the “ ” case.
pay checks. On April 14, 1980 Bildisco filed for bankruptcy
under Chapter 11 of the Bankruptcy Code. The bankruptcy
court appointed the partnership as Debtor In Possession
and authorized it to operate the business under 11 U.S.C.
$1107. Bildisco, Debtor In Possession, continued to fail to
make pension and welfare payments and to fail to forward
to the Union the dues it deducted from the employees’ pay
enecks. The Debtor In Possession also failed to give the
employees the raises as called for by the collective bargain-
ing agreement and denied them vacation pay. At no time
did the debtor company or the Debtor In Possession seek
to negotiate with the Union concerning changes in the col-
lective bargaining agreement.
In December 1980 the Debtor In Possession petitioned
the Bankruptcy Court under 11 U.S.C. $365(a) for rejee-
tion of the collective bargaining agreement. A hearing was
held on January 5, 1981, after which the Bankruptey Court
approved the petition to reject the labor contract, The
Bankruptey Court did not explain what standard it was
using in approving rejection.
The Union appealed this decision to the District Court.
The District Judge observed that under the superseded
Bankruptcy Act judicial evaluations of petitions to re-
ject contracts utilized a “business judgment” test for nor-
mal contracts and a more rigorous test for labor contracts
(30a to 31a). Accepting without comment the figures
found by the Bankruptey Court, the District Court ruled
that the contract would have been rejected under either
standard and it was therefore not neeessary to determine
which standard should apply. Accordingly, the District
Court affirmed the Bankruptcy Court decision approving
rejection of the collective bargaining agreement in effect
between Bildisco and the petitioner without deciding what
standard of law applies.
The petitioner then appealed to the Third Circuit. Not-
ing that the appeal presented “a significant confrontation
of labor and bankruptcy policies”, the Third Circuit viewed
its task as reconciling the apparent conflict between the
4
National Labor Relations Act (NLRA) and the Bankruptcy
Code (Code) (10a, 7a).
Despite the existence in the NLRA of provisions deal-
ing expressly with mid-term modification of labor con-
tracts (29 U.S.C. §158(d)), the Third Circuit commenced
and centered its reconciliation upon the Code. The court
first examined whether the Code expressly excluded labor
contracts from its purview (70a to lla). Though acknowl-
edging that no clear congressional! intent in this area could
be discerned, the court found several factors leading it to
view NLRA contracts as within the scope of the Code. To
this end the Third Circuit noted that prior to the enactment
of the new Code there were several court decisions allow-
ing rejection of a collective bargaining agreement under the
bankruptcy laws; that the Code specifically exempted cer-
tain other types of contracts (such as shopping center
leases); and that there was an exception in the Code (11
U.S.C. §1167) for labor contracts under the Railway Labor
Act (RLA). The court concluded not only that NLRA con-
tracts are covered by the rejection provision in the Code,
but a’so expressly ruled that there is no requirement to
comply with 48(d) of the NLRA prior to rejection under
the Code (12a, 21a).
The court then turned to an analysis of the applicable
standard which a court should employ in determining
whether to approve rejection of NLRA contracts under
§365(a). The court noted that the standard for rejecting
normal contracts is the “business judgment” test, whereby
a contract may be rejected if the debtor in possession
demonstrates that a more beneficial contract can be en-
tered into (12a). The court also observed that under the
superseded Bankruptey Act the courts had established
a more stringent test for rejection of labor contracts
(12a). As the Third Circuit observed, this stricter test
was first announced by a circuit court in Local Union No.
455 v. Kevin Steel Products Inc., 519 F.2d 698, 707 (2d
Cir. 1975), in which the Second Circuit stated that a re-
jection of a labor contract may occur after a “thorough
scrutiny, and a careful balancing of the equities on both
sides.” As the Third Circuit further noted, the Second
Circuit subsequently expanded upon that standard by
ruling that a labor contract may be rejected only
where the debtor in possession shows both that re-
jection is necessary to save the debtor company from
imminent collapse and that a balancing of the equities
weighs in favor of the debtor. BRAC vy. REA Express,
Inc., 523 F.2d 164, 169, 172 (2d Cir.), cert. den., 423 U.S.
1017 (1975) (13a). The Third Cireuit obliquely observed
that the lower courts have followed the test as enunciated in
REA Express (13a to 14a).
However, the Third Circuit expressly rejected the Second
Circuit’s test as stated in REA Express, castigating it as
mere “gloss” upon, and the “illegitimate progeny” of, Kevin
Steel (13a; 16a). Instead, the Third Circuit declared that
a labor contract may be rejected after a “thorough scru-
tiny, and a careful balancing of the equities on both sides.”
(A15). Because the District and Bankruptcy Courts below
had approved rejection of the labor contract without clear-
ly stating the standard or the elements of the balancing,
the decision below was reversed and the matter was re-
manded for further proceedings consistent with the Third
Circuit’s opinion.
In seeking this Court’s review by writ of certiorari the
petitioner does not dispute the Third Circuit’s factual as-
sessments or its reversal and remand of the bankruptcy
ease. The petitioner requests review because of the errone-
ous legal reasoning and ruling rendered by the Court of
Appeals. Nor, significantly, does the petitioner dispute the
Third Cireuit’s conclusion that NLRA labor contracts are
executory contracts which may ultimately be reviewed and
rejected under §365(a) of the Code. Rather, the peti-
tioner’s disagreement with the Third Circuit is twofold.
First, the petitioner submits that the Third Circuit wrongly
ignored the provisions and policies of the NLRA by hold-
ing that rejection under the Code could be granted without
first requiring the debtor company or debtor in possession
to have complied with the mid-term concession bargain-
6
ing requirement contained in §8(d) of the NLRA. Sec-
ondly, the Third Cireuit erred—and created a substan-
tial and direct conflict between the circuits—in ruling that
a labor contract could be rejected simply after a weigh-
ing of the equities and without consideration of whether
rejection is necessary to the continued operation of the
company.
As noted above, this case is part of a consolidation of
two cases presented to and decided by the Third Circuit.
The sibling case is an enforcement petition filed by the
National Labor Relations Board arising out of unfair labor
practice complaints concerning the conduct of the company
before it filed for bankruptcy in April 1980 and during
the period between the April 14, 1980 filing and the Janu-
ary 1981 rejection of the contract. In those complaints the
Board alleged that the company’s pre and post-filing uni-
lateral changes in the terms and conditions of employment
violated the NLRA. Because the debtor in possession failed
to respond to the complaints, summary judgment against it
was rendered by the Board.
However, the Third Circuit concluded that, under the
facts of this case, entry of summary judgment was improper
(22a to 24a). Secondly, the court ruled that the debtor in
possession was a new entity, not bound by §8(d) or by the
collective bargaining agreement in effect between the debtor
and the petitioner union (20a to 21a). Accordingly, the
Third Circuit refused to enforce the Board’s order.
The Board is petitioning this Court on the issues flow-
ing from the Third Circuit’s ruling that the debtor in pos-
session is a new entity not bound by the contract of the
debtor company or by §8(d). Consequently, the petitioner
will not burden the Court with lengthy argument on that
matter. This petitioner supports the arguments made by
the Board in its petition.
ARGUMENT
POINT I
The decision of the Court of Appeals that a debtor
in possession may reject a labor contract under 11 U.S.C.
§365 (a) of the Bankruptcy Code without requiring that
the debtor in possession first comply with the bargaining
requirement for mid-term contract modifications con-
tained in 29 U.S.C. §158(d) of the National Labor
Relations Act should be reviewed by this Court because
it presents a significant issue of reconciling a conflict
between two fundamental statutory schemes and because
the Court of Appeals’ decision constitutes an improper
analysis and treatment of these two statutes.
This petition presents the Supreme Court with a con-
flict between two comprehensive statutory schemes: the
National Labor Relations Act, 29 U.S.C. §4151-169 (1976),
which defines the rights of workers and the method of
making, maintaining, and modifying labor contracts, and
the Bankruptcy Code, 11 U.S.C. §§101-1330 (1979), which
permits a financially distressed business to rearrange its
operation, restructure its debt, and reject its executury con-
tracts. The conflict arises when a debtor in possession seeks
to terminate a collective bargaining agreement which the
debtor had signed with a union. Though this issue clearly
implicates both the letter and spirit of the labor law, the
Court of Appeals for the Third Circuit resolved the con-
flict by holding that the provisions of the NLRA are wholly
inapplicable and by formulating a standard for rejection
of labor contracts under the Bankruptcy Code which dis-
serves the labor law and needlessly destroys the pension
and seniority rights earned by the workers. Furthermore,
in creating this standard the Third Circuit explicitly
eschewed as “illegitimate” the test previously enunciated
by the Second Circuit and followed by the lower courts
throughout the nation under the superseded Bankruptcy
Act and the new Code.
8
Resolution of this tension between the labor and bank-
ruptcy laws, and of ‘ne now existing direct conflict be-
tween the Second ana Third Circuits, is of national im-
port, for what is at stake here is not the technical question
of statutory construction but whether the pension, welfare
and seniority rights earned by this country’s workers
must be sacrificed to the sanctity of a bankruptcy plan
where the sacrifice is not essential to the continued op-
eration ot the company. Resolution of this question is
made all the more imperative because of the increasing
number of bankruptcies being filed by businesses.* Clearly
the conflict between the circuits on this issue is a matter of
great public concern requiring resolution by the highest
forum.
The petitioner’s position on the reconciliation of these
two statutory schemes, and on the Third Circuit’s errors,
is both simple and equitable: a debtor in possession must
attempt to modify its labor contract in compliance with the
express provisions of the NLRA (29 U.S.C. $158 (d)) be-
fore obtaining rejection of that labor contract under the
Bankruptey Code (11 U.S.C. §365(a)).°* Only after the
* Commentaries on the large number of bankruptcies filed during
the past year have been widely reported in the press. For example,
in the first of a four-part article reported in the New York Times,
it was stated that, during the year ending June 30, 1982, 77,503
businesses filed for bankruptcy in the federal courts. N.Y. Times,
Sept. 30, 1982, at page 1, col. 2.
** 29 U.S.C. $158(d) provides in pertinent part that:
(d) For the purposes of this section, to bargain collec-
tively is the performance of the mutual obligation
employer and the representative of
i
tells
(i
l
:
ij!
ti
9
bargaining required by §8(d) has failed should the debtor
in possession be able to obtain rejection of a labor contract
under $365(a) of the Code. The Third Circuit’s errors
consist of: (a) its exclusion of any role for the labor laws
(Footnote continued from preceding page)
to agree to a proposal or require the making of a con-
cession: Provided, That where there is in effect a collec-
tive-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 desiring such
termination or modification—
(1) serves a written notice upon the other party to the
contract of the proposed termination 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 proposed modifications;
‘3) notifies the Federal Mediation and Conciliation
Service within thirty days after such notice of the ex-
istence of a dispute, and simultaneously therewith notifies
any State or Territorial agency established to mediate and
conciliate disputes within the State or Territory where
the dispute occurred, provided no agreement has been
reached by that time; and
(4) continues in full force and effect, without resort-
ing 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:
11 U.S.C. §365(a) of the new Bankruptcy Code provides:
in sections 765 and 766 of this title
i nabsections (), (c), and (d) of this section, the
subject to the court's approval, may assume or
any executory contract or unexpired lease of the
qa
i
(Footnote continued on following page )
10
prior to rejection of a labor contract,* and (b) its formula-
tion of a standard for allowing rejection of a labor contract
under §365(a) of the Code which contravenes the purposes
of the labor laws, conflicts with the standard devised by the
Second Circuit, and allows the destruction of pension,
welfare and seniority rights even where it is not neces-
sary for the continued operation of the reorganized busi-
ness.
It is at this point an elementary lesson in history that
the industrialization of this nation was marred by the
economic warfare flowing from the effort of factory work-
(Footnote continued from preceding page)
Significantly, an “employer” for purposes of the NLRA in-
cludes trustees in chapter 11. 29 U.S.C. §152/1), (2). Al-
so, it is at this point axiomatic that the requirement in 29 U.S.C.
$158 (d) (also called §8(d)) for bargaining applies to any
effort by a party to a labor contract to effect a mid-term change
in the contract. Dunham-Bush, Inc., 111 L.R.R.M. (BNA) 1389,
1391, 264 N.L.R.B. No. 175 (1982); Oak Cliff-Golman Baking
Co., 85 L.R.R.M. (BNA) 1035, 1036, 207 N.L.R.B. 1063, 1064
(1973), enfd, 505 F.2d 1302 (Sth Cir. 1974); C & S Industries,
Inc., 62 L.R.R.M. 1043, 158 N.L.R.B. 454, 459 (1966). These
cases also make clear that a violation of §8(d) constitutes an
unfair labor practice in contravention of 29 U.S.C. §158(a)(5).
*In its brief below this petitioner did not explicitly argue that
§8(d) must be followed prior to obtaining rejection under §365(a)
of the Code. However, that argument was clearly at issue in the
Board’s enforcement case, in which the petitioner intervened and
supported the Board. Moreover, the Third Circuit’s decision ex-
pressly states and holds that there is no need to comply with §8(d)
before obtaining rejection under the Code (12a, 2la). The Third
Circuit premised that conclusion upon its “new entity” theory, which
was clearly in issue below. Also, the petitioner’s arguments con-
cerning the need to adhere to §8(d) prior to resort to §365(a)
is a purely legal argument which is entirely consistent with its
argument below. For these reasons, the question concerning the
role of §8(d) of the NLRA in relation to §365(a) of the Code
is properly before, and reviewable by, this Court. Kiefer-Stewart
Company v. Joseph E. Seagram & Sons, Inc., 340 U.S. 211, 214
(1951).
ll
ers to unite so as to obtain reasonable wages and humane
working conditions. That warfare led to the enactment
of the NLRA. The NLRA embodies the carefully con-
ceived congressional arrangement of the balance of eco-
nomic power appropriate between labor and management
and it prescribes procedures which promote and maintain
that economic equivalence. The balance struck by Congress
is a matter of public policy and is not to be restructured
by the judiciary. Teamster Union Local 20 vy. Morton,
377 U.S. 252, 259 (1964).
Indeed, the courts have been respectful of the elaborate
system of laws establishing and regulating labor relations.
In particular, the courts have long noted the embattled
origin and unique nature of labor contracts. As this
Court explained:
“The collective bargaining agreement states the
rights and duties of the parties. It is more than a
contract; it is a generalized code to govern a myriad
of cases which the draftsmen cannot wholly antici-
pate... The collective agreement covers the whole
employment relationship. It calls into being a new
common law—the common law of a particular in-
dustry or of a particular plant...
...A collective bargaining agreement is an effort
to erect a system of industrial self-government. When
most parties enter into contractual relationship they
do so voluntarily, in the sense that there is no real
compulsion to deal with one another, as opposed to
dealing with other parties. This is not true of the
labor agreement. The choice is generally not be-
tween entering or refusing to enter into a relation-
ship, for that in all probability preexists the nego-
tiations. Rather it is between having that relation-
ship governed by an agree-upon rule of law or leav-
ing each and every matter subject to temporary res-
olution dependent solely upon the relative strength,
at any given amount of the contending forces.”
United Steelworkers v. Warrior d Gulf Nav. Co., 363 US.
574, 578-579 (1960).
12
The rights created and affected by a labor contract are
two-fold: the rules which maintain order at the workplace
and the rules which guarantee economic security to
the workers. Among the former are seniority, grievance-
arbitration procedures for dispute resolution, disciplinary
procedures, and no-strike/no lock-out clauses. Among the
latter are welfare and pension plans. Unlike a normal com-
mercial contract, a collective bargaining agreement is an
organic being whose terms are gleaned not merely from its
express clauses but also from the history of relations be-
tween the workers and the company. John Wiley d& Sons
v. Livingston, 376 U.S. 543, 550 (1963). Furthermore, the
rights and benefits earned by the workers are not measured
by the existence of any one contract; rather, those rights
and benefits derive their value from the expectation that
the parties will continue to sign and adhere to successive
labor contracts guaranteeing the pension and seniority
rights accrued during any single contract. This expecta-
tion of successive contracts is predicated upon the core fac-
tor which distinguishes the specie “labor” contract from
its genus of “executory” contract: workers and manage-
ment cannot exist without each other, thereby rendering
the notion of “voluntariness” irrelevant. Moreover, the
rights and benefits accrued cver time by the workers can-
not be remedied by the usual means of awarding damages.
For example, unlike the normal commercial contract freely
entered into by business adventurers, the pension and se-
niority rights earned by the workers defy adequate com-
pensation if the employer is allowed to simply end the con-
tract. See 11 U.S.C. §507(a)(3)(4). See also Local No.
455 v. Kevin Steel, supra at 707.*
* Importantly, the petitioner is not suggesting that labor con-
tracts fall outside the category of executory contract. The peti-
tioner acknowledges that, ultimately, a labor contract may be sub-
ject to rejection under §365(a) of the Code. The petitioner's
argument is simply that a labor contract is a unique specie and,
because it is completely defined and determined by the NLRA,
resort should be had to that statute prior to rejection review under
§365(a).
13
’ The policies and purposes of the Bankruptcy Code are
entirely different. That Code serves two primary fune-
tions: to preserve funds for distribution to creditors and
to allow a faltering company to facilitate financial re-
habilitation through reorganization rather than liquida-
tion. Meyer v. Commissioner, 383 F. 2d 883, 890 (Sth Cir.
1967). A reorganized company continues in operation,
a trustee or debtor in possession is appointed by the court
to manage the company during its recovery, and its debts
are reduced or extended so as to allow it to continue. As is
the case here, the court will often appoint the owners of
the debtor company to continue to operate the reorganized
business as “debtor in possession.” As here, the debtor in
possession may be employing the same workers in the
same jobs and for the same managers as the prebank-
rupt company.® As part of the reorganized company’s
effort to devise economic arrangements conducive to its
continuance, the Code provides that the debtor in posses-
sion may petition the court to reject an executory con-
tract. 11 U.S.C. §365(a).
As described above, §8(d) of the NLRA explicitly con-
tains an absolute requirement that a party seeking to effect
mid-term changes in its labor contract so as to obtain more
beneficial terms may do so only if it bargains with and ob-
tains the consent of the other party. See C ¢ S Industries,
Inc., supra, 62 L.R.R.M. at 1045. Though the party being
requested to agree to changes is not required to negotiate,
no less consent to any changes, §S(d) at least creates the
mechanism for and possibility of arriving at mid-term modi-
fications without resort to strikes, lock-outs, or unfair uni-
lateral changes in the contract. Contrary to the mid-term
modification procedures in §8(d) formulated by Congress to
deal exclusively with labor contracts, contract rejection
in §365(a) of the Code is merely a general grant of power
* It should be emphasized that the issues in this case deal only
with a company in reorganization, not with one in liquidation.
14
to a court to approve rejection of “executory contracts”
or “unexpired leases.” Section 365(a) does not define
executory contract, does not refer or allude to labor con-
tracts, and does not contain any mechanism or authority
for modifying a contract. 2 Collier on Bankruptcy
7365.01(2], at 365-11 (15th ed. 1981).
Viewed against this background, the question of how
and when a debtor in possession may modify or terminate
it labor contract may now be answered. A fundamental
rule of construction is that “a more specific stat-
ute will be given precedence over the more general
one, regardless of their temporarl sequence.” Busic v.
United States, 446 U.S. 398, 406 (1980). See also Preiser
v. Rodriguez, 411 U.S. 475, 489-490 (1973). Addressing an
essentially identical statutory relationship, this Court in-
structed that where one statute pertains to a particular
subject and contains a provision applying to a specific
situation, that statute must control over a more broad stat-
ute which may also cover in its generality the same situ-
ation. Morton v. Mancari, 417 U.S. 535, 550-551 (1974). At
the very least, where two laws may apply to the same prob-
lem and are capable of co-existence, a court should not
ignore one. Morton v. Mancari, supra. Based upon these
precepts of statutory construction and reconciliation, it is
manifestly evident that the more apposite provisions
in §8(d) of the NLRA, which is an essential aspect
of a comprehensive statutory scheme regulating the pre-
cise specie of contract at issue here, should be given pri-
ority over the more general and undefined provision of the
Code covering rejection of the genus of executory con-
tracts.
Another factor which supports the priority of the NLRA
is the espacity of that statutory process to allow for
the preservation of essential worker rights and benefits
while simultaneously serving the debtor’s need to reduce
expenses. Section 8(d) of the NLRA allows for modi-
fication of collective bargaining agreements without in-
terrupting the production of goods. Mastro Plastics Corp.
15
v. NLRB, 350 U.S. 270, 284 (1956). Section 8(d) provides
the authority and basis for the parties to a labor agreement
to at least seek a modification of the labor contract because
of the new needs or problems of one party. During this pro-
cess the debtor company would undoubtedly be able to im-
press upon the union the distressed state of the company’s
finances, compellingly evidenced by its having filed for bank-
ruptcy. In light of the desire of the union to save jobs and
pensions, the parties would hopefully bargain and agree
upon a modified contract which would both substantially re-
duce the company’s expenses and preserve essential worker
rights. For example, the union may agree to forgo raises,
give back some holidays and break-time, and shorten the
hours worked by each employee, thereby preserving senior-
ity rights and pension and welfare payments, and main-
taining the grievance and arbitration procedures.*®
The range of possible compromises is limited solely
by the parties’ imaginations. If they are unable to agree
upon modifications, or if the union refuses to negotiate,
then—but only then—should the employer be able to ob-
tain rejection of the contract under $365(a) of the Code.
However, it is only by following the procedures in 68(d)
of the NLRA that the parties can even attempt to devise
a mutually satisfactory mid-term modification.
Unlike §8(d) of the NLRA, §565(a) of the Bankruptey
Code does not provide for or permit mere modification.
Rather, it is an all or nothing proposition and a court
cannot fashion a compromise. Jn re David A. Rosnow,
Inc., 9 Bankr. Rpts. 190, 193 n. (Bankr. D. Conn. 1981);
* The labor reports are replete with discussions of successfully
negotiated “give back” or “concession” contracts in which the
unions forgo wage and cost of living increases, surrender days of
pay or agree to invest that pay in the company, and agree to de-
creases in break-time in exchange for job protections and assur-
ances against plant closings. See, eg. 109 L.R.R.M. (BNA)
213, 214, 228, 229, 321 (1982); 110 LR.RM. (BNA) 3, 83
(1982).
16
2 Collier on Bankruptey, 9365.01[2] at 365-11 (15th ed.
1981). To be sure, the debtor in possession who obtains
rejection of a labor contract under $365(a) may be obliged
to negotiate a new contract with its employees should they
still desire a union’s representation, Local Union No. 455
v. Kevin Steel, supra at 704, but clearly the ability of the
workers to retain their basic economic and seniority re-
lated benefits is reduced where the contract has already
been terminated. Moreover, under the Third Circuit's
theory that a debtor in possesesion is a new legal entity
akin to a successor, the debtor in possession may not be
under any obligation to even bargain with the workers.
Howard Johnson Co. vy. Hotel Employees, 417 U.S. 249, 259-
262 (1974). NLRB vy. Burns International Security Ser-
vices, 406 U.S. 272 (1972). Even if the debtor in possession
is obliged to bargain because a majority of its relevant
workforce had been employed by the debtor, bargaining
prior to termination prevents a disruption in the accrual
of seniority and pension rights and lessens the likelihood
of a crippling strike which an employer’s unilateral changes
would induce.
Plainly stated, Congress has carefully composed a body
of rules and procedures regulating the formation, altera-
tion, and termination of labor contracts. That statutory
scheme allows for relief where one side’s economic posi-
tion has so drastically changed as to necessitate modifi-
cation. An administrative agency has been vested with
authority to monitor labor contract changes so as to main-
tain industrial peace, preserve the continued operation of
the employer, and safeguard the employees’ basic rights.
While the bankruptcy laws do contain a provision gener-
ally allowing for the total rejection of an “executory con-
tract,” that provision should not take precedence over the
more apposite labor laws. The NLRA, and its enforcement
agency, should be afforded initial supervision over the
modification of a labor contract. “[W]here the matter in
controversy has heen entrusted by Congress to an adminis-
trative agency, the bankruptcy court normally should stay
17
its hand. . .” Nathanson v. NLRB, 344 U.S. 25, 30 (1952).
That principle should pertain here.
Contrary to the well established principles of statutory
construction which accord precedence to specific statutes
over general ones, and contrary to this Court’s admoni-
tion that labor issues should be monitored by the agency
charged by Congress with responsibility for enforcement
of labor laws rather than by a bankruptcy court, the Third
Circuit eschewed the notion that the labor laws even ap-
ply to an attempt to reject a labor contract (12a, 21a). In-
stead, the Third Circuit stood these interpretative rules
on their head and reasoned that because §365(a) of the
Bankruptcy Code does not declare that labor contracts are
immune from rejection, they are exclusively and solely
within the purview of §365(a). This inverse approach to
statutory acommodations must be reversed.
A clue to the Third Circuit’s backwards approach to
statutory construction and conciliation may be found in its
reference to two notions: 1) the provision in the Code which
exempts from §365 those labor contracts which are sub-
ject to the Railway Labor Act, and 2) the description of
the debtor in possession as a “successor.” However, neither
notion supports the Third Circuit’s preclusion of the appli-
eability of the NLRA prior to rejection review under the
Code.
To be sure, the Code does contain a proviso which ex-
empts RLA labor contracts from review under $365. 11
U.S.C. §1167.* But this exception does not suggest the in-
ference that NLRA contracts may not initially be subjected
to the requirements of §8(d) of the NLRA before such
contracts are evaluated for rejection under §365(a) of the
* 11 U.S.C. §1167 states:
“Notwithstanding section 365 of this title, neither 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 Rail-
way Labor Act (45 U.S.C. 151 et seq.) except in accordance
with section 6 of such Act (45 U.S.C, 156).”
18
Code. Indeed, little can be gleaned from the RLA excep-
tion in $1167.* Section 1167 was contained in the super-
seded Bankruptcy Act in 11 U.S.C. §205(n) (also known as
$77(n)). That section was enacted in 1934, after the RLA
but before the passage of the NLRA. (Section 8(d) was
added to the NLRA in 1947.) Obviously, the failure of $205
(n) to include NLRA contracts cannot be laid to congres-
sional intent. See Local Union No. 455 v. Kevin Steel
Products, Inc., 381 F. Supp. 336, 338 (S.D. N.Y. 1974),
reversed, 519 F.2d 698 (2d Cir. 1975) That NLRA con-
tracts were not incorporated into $1167 in the 1978 re-
vision of the bankruptcy laws is at best a speculative basis
upon which to conelude that NLRA labor contracts are
completely stripped of their unique nature, thereby exclud-
ing any role for the NLRA. On the contrary, the legisla-
tive history of 4205(n), the progenitor of 41167, reveals
that the RLA exception was predicated upon principles
equally appropriate to NLRA contracts: to protect
workers from the unilateral action of bankrupt employers
reducing wages and benefits. 76 Cong. Rec. 2927 (1933). See
also Note, Bankruptcy And The Rejection of Collective
Bargaining Agreements, 51 Notre Dame Lawyer 819, 827
(1976). Simply stated, the RLA exception contained in
1167 does not suggest or require the conclusion that NLRA
labor contracts cannot or should not be subjected to the
* Judicial interpretation of the scope of §1167 is sorely muddled.
In Local 455 v. Kevin Steel, supra at 705, the Second Circuit, ac-
knowledging that Congress’ silence on NLRA contracts is capable
of various inferences, concluded that the RLA exception applied
only to “labor contracts” covered by the RLA. However, upon
reexamination the Second Circuit determined that the exception
applied only to “railroad employees,” not to “contracts.” BRAC
v. REA Express, Inc., supra at 170. Thus the present status of the
RLA exception is based not on whether the contract is subject
to the RLA or the NLRA but on whether the affected employees
are railroad or non-railroad employees—an analysis which has no
bearing on whether NLRA contracts may not be subjected to the
provisions of §8(d) of the NLRA prior to rejection review under
§365(a) of the Code.
19
bargaining provisions of §8(d) of the NLRA before being
evaluated under §365(a) of the Code.
Also mistaken is the Third Circuit’s use of the successor
analogy. Under this theory, first set forth by the Second
Cireuit in Kevin Steel, a debtor in possession is likened to
a successor as described in NLRB v. Burns International
Security Services, 406 U.S. 272 (1972). According to the
Third Circuit, the successor is a “new entity,” legally dif-
ferent and apart from the prebankrupt company and thus
neither a party to the labor contract the company had
signed with the union nor bound by the requirements of
§8(d) of the NLRA. This analogy is neither legally sup-
portable nor pragmatically useful.
In reorganizations under the Code the debtor in posses-
sion is often, as it is here, the exact same people who
owned and operated the pre-bankruptcy company. This is
vastly different than a successor who, as in Burns and
Howard Johnson, is an entirely different, unrelated com-
pany which purchases the predecessor’s operation or which
completely replaced the predecessor in supplying a service.
While it is eminently reasonable to conclude that a re-
placement or purchasing company is e wholly different
legal entity from the completely separate predecessor,
there is no rational basis for viewing the pre-bankruptcy
owners as legally different simply because those same per-
sons are now labeled debtors in possession. Howard John-
son Co. v. Hotel Employees, supra at 259 n.5. Not only
is the debtor in possession frequently the same people as .
those who previously ran the company, the debtor in pos-
session will eventually become the owner of the ongoing
post-bankruptcy company. In short, the debtor in pos-
session in a reorganized company is merely a label reflect-
ing the supervisory role played by a bankruptcy court
during the period of economic illness from which the
company is temporarily suffering.
Furthermore, the theory that a debtor in possession is
unfettered by the contracts of the prebankruptcy com-
pany is undermined by numerous other circuit court deci-
20
sions which have bound the debtor in possession to the
debtor company’s prebankruptcy obligations. For ex-
ample, in NLRB v. Baldwin Locomotive Works, 128 F.2d
39 (3d Cir. 1942) the NLRB sought to enforce a remedy
against a debtor in possession for unfair labor practices
committed in prebankruptey by the debtor. The debtor
in possession defended by arguing that the debtor and
debtor in possession were distinct entities and cannot be
held responsible for the acts of each other. NLRB v.
Baldwin Locomotive, supra at 42. The court disregarded
the alleged separateness and looked instead at the sub-
stance of the relationship, concluding that the commonality
of interest far outweighed any differences. As the Bald-
win court explained:
“(wljhere managerial control and economic interest
of the debtor in possession and the [debtor] com-
pany are the same ... then in no legally sig-
nificant sense .. . can the [debtor] be differentiated
from the debtor i in possession so far as the employer-
employee relationship is concerned.”
NLRB vy. Baldwin Locomotive, supra at 43-44.
Similarly, numerous other courts have eschewed the
theory underlying the new entity notion. In NLRB v.
Coal Creek Coal Company, 204 F.2d 579, 580 (10th Cir.
1953) the court, citing Southport Petroleum Company
v. NLRB, 315 U.S. 100 (1942), held that liability for pre-
bankruptcy infringements of labor laws cannot be evaded
by “reorganization, transfers, or any other ‘disguised con-
tinuance’”, including receivership. See also Johnson vy.
England, 356 F.2d 44, 49 (9th Cir. 1966). In different but
equally apposite contexts the circuit courts have ruled
that a bankruptcy court’s equitable powers are limited by
the prohibitions on injunctions contained in the Norris-
LaGuardia Act (29 U.S.C. 4101 et seq.), (See, e.g., In re
Third Avenue Transit Corp., 192 F.2d 971, 973 (2d Cir.
1951)), and that the automatic stay provisions of the
Bankruptey Code are subordinate to the requirements of
21
the labor laws. Petrusch v. Teamster Local 317, 667
F.2d 297 (2d Cir. 1981); In re Bel Air Chateau Hospital,
611 F.2d 1248 (9th Cir. 1979).
It is therefore hardly surprising that the “new entity”
doctrine espoused by the Second Circuit in Kevin Steel
and adopted by the Third Circuit sub judice has been
criticized by the legal community. As one commentator
stated:
“[{I)t is difficult to see how a debtor in possession
ean be truly distinct from its former self. Where
there have been no changes in management, except
to introduce overall bankruptey court supervision,
any analogy to successor employer situations seems
tenuous.”
Note, Bankruptcy Law—Labor Law—Rejection of Collec-
tive Bargaining Agreements As Executory Contracts in
Bankruptcy, 22 Wayne L. rev. 165, 173 (1975). Aceord,
Countryman, Executory Contracts in Bankruptcy: Part
II, 58 Minn. L. Rev. 479, 489 (1974); LaPenna, Bank-
ruptcy and Collective Bargaining Agreement, 29 N.Y.U.
Lab. Conf. 169, 172 (1976). Recently a district court ob-
served that the new entity theory “does not easily trans-
late into other areas of bankruptcy law.” Jn re Allied
Supermarkets, Inc., 6 Bankr. Rptr. 968, 976 n. 8 (E.D.
Mich, 1980).
Indeed the new entity theory creates paradoxes and
problems which would challenge Zeno. For example, if
a debtor in possession is a new entity and thus not bourd
as a matter of law by the prebankruptcy company’s labor
contracts, then why does the debtor in possession need
to petition to reject that contract at all? Similarly, if
the debtor in possession is not bound by the labor con-
tract, then surely the language in $365(g) describing rejec-
tion as a “breach” of the contract is confusingly inappro-
priate. Also, if the debtor and debtor in possession are
wholly distinct legal beings, is the postbankruptcy com-
pany or union bound by a labor contract assumed un-
der §365(a) by the debtor in possession? Perhaps these
22
problems have contributed to the Second Circuit’s con-
tinual narrowing of the new entity theory it conjured
up in Kevin Steel. See In re Unishops, 543 F.2d 101%,
1018-1019 (2d Cir. 1976); Truck Drivers Local 807 v.
Bohack Corp., 541 F.2d 312, 319-20 (2d Cir. 1976), aff’d
per curiam after remand, 567 F.2d 237 (2d Cir. 1977),
cert. den., 439 U.S. 825 (1978) (Second Circuit limited
the “new entity” theory solely to rejection of labor con-
tracts.). But these abortive and awkward efforts to pre-
serve the untenable “new entity” fiction will not suffice.
The increasingly artificial reasoning needed to sustain
the life of that wrongfully conceived doctrine must be
removed. The more sound and workable position is that
the debtor in possession remains bound by the terms of
the labor contract and should comply with the negotiation
requirement created by Congress in §8(d) of the NLRA
for mid-term modification before obtaining rejection un-
der §365(a). The Third Cirenit’s adoption and use of
the new entity theory should be discarded and corrected
by this Court.
Before proceeding to the second and final Point in this
petition, it must be noted that if the successorship concept
were applicable here, the result should have been that Bil-
disco, Debtor in Possession, was bound by both the labor con-
tract and (8(d) of the NLRA. In NLRB vy. Burns Interna-
tional Security Services, supra, upon which the Third Cir-
cuit relied in employing the new entity analysis, the success-
sor company out-bid and replaced the predecessor in pro-
viding security services at a facility. The successor ulti-
mately employed 42 guards, 27 of whom had been employed
by the predecessor and had been under a collective bar-
gaining agreement. The successor refused to bargain with
its employees and the NLRB ordered it to honor the terms
of the collective bargaining agreement. The Court found
that there was no merger, sale of assets, or dealings be-
tween the predecessor and successor; rather, they were en-
tirely separate companies who competed on bids for secur-
ity servies. NLRB vy. Burns, supra, at 286. Because of the
23
utter absence of any relationship between the two com-
panies, the Court concluded that the successor was not a
party to the collective bargaining agreement in effect be-
tween the union and the predecessor and was not obligated
to comply with that contract. NLRB v. Burns, supra at 286-
287. However, the Court also ruled that though a successor
is ordinarily free from the terms of its predecessor’s con-
tract and free to set new initial terms of employment, there
would be circumstances under which the successor would
be required to consult with the union prior to fixing new
terms of employment. NLP y. Burns, supra at 294-295.
For example, where the successor decided to employ all
or most of the workers who had been employed by the pre-
decessor under the collective bargaining agreement, then
the successor must bargain with the union before making
any changes in the terms of employinent. NLPE vy. Burns,
supra at 295. In the instant case it was never disputed that
all of the Debtor in Possession’s employees performing bar-
gaining unit work had been employees of the prebankrupt
company and had been covered by the labor contract. Thus,
under Burns, the Debtor in Possession would have heen
required to bargain with the petitioner Union prior to
instituting changes in the contract.
The Third Circuit’s failure to correctly apply the suc-
cessorship theory only emphasizes its error in employing
the analogy in the first place. Moreover, the error is not
limited to the question whether a debtor in possession
should be required to comply with ¢8(d) of the NLRA
prior to obtaining rejection under $365(a) of the Code; it
also implicates the Third Circuit's holding that upon rejec-
tion the debtor in possession is immune from unfair labor
practice violations arising out of its post-filing conduct. (In
this case that would immunize the Debtor in Possession
from liability for the unilateral changes it made after April
14, 1980, the date upon which the debtor filed for bank-
ruptey). The Third Circuit’s conclusion that as a matter
of law rejection of a labor contract retroactively protects
the debtor in possession from violations of the labor laws
resulting from his having made unilateral changes in the
terms of employment flies in the face of the Supreme
Court’s holdings in Burns.
24
POINT II
The decision of the Court of Appeals that a labor
contract may be rejected under 11 U.S.C. §365(a) of
the Bankruptcy Code merely upon a weighing of the
equities should be reviewed by this Court because it
directly conflicts with the standard developed by the
Second Circuit and followed by the lower courts and
because the standard adopted sub judice is unneces-
sarily destructive of workers’ pension, welfare and
seniority rights.
Whether this Court agrees with the petitioner that the
bargaining provisions in §8(d) of the NLRA should be em-
ployed and exhausted prior to a rejection of a labor con-
tract under §365(a) of the Code, or agrees with the Third
Cireuit that rejection of a labor contract may proceed
under §365(a) without regard to the dictates of the NLRA,
it is apparent that the standard established by the Third
Cireuit for review of labor contracts under 4365(a) is
woefully inadequate and in direct conflict with the more
considered standard formulated by the Second Circuit and
followed by the lower courts. It is submitted that when-
ever a court evaluates a petition under §365(a) to reject a
labor contract, the test established by the Second Circuit
in REA Express should control.
Prior to the Third Cireuit’s decision in this case, the
courts throughout the nation applied the test enunciated
in REA Express by the Seeond Circuit for evaluating
petitions to reject labor contracts under the Bankruptey
Act.* As noted above, that standard was developed by
* Petitions to reject executory contracts under the superseded
Bankruptcy Act were made pursuant to §313(1), the equivalent
of the current §365(a). 11 U.S.C. 313(1) stated, in pertinent
part, that:
“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 of such contracts and to such other parties as the
court may designate[.]”
25
the Second Circuit in a series of cases, In its first deci-
sion on this topic the Second Circuit stated that rejection
of a labor contract may be approved “only after a thor-
ough scrutiny, and careful balancing of the equities on
both sides...” Local No. 455 v. Kevin Steel, supra at
707. This test was plainly more rigorous than the usual
“business judgment” test applied to normal executory
contracts, The reason for the heightened scrutiny of
labor contracts was simple, for in allowing rejection of
a labor contract the court
“may be depriving the emplovees affected of their
seniority, welfare and pension rights, as well as
other valuable benefits which are incapable of form-
ing the basis of a provable claim for money dam-
ages.”
Local No. 455 v. Kevin Steel, supra at 707.
Indeed, it was this Draconian consequence of rejec-
tion under the bankruptcy laws vhich compelled the See-
ond Cireuit to clarify and reinforce the requirements
for approval of a petition to reject a labor contract.
BRAC vy. REA Express, Inc., 523 F.2d 164, 172 (2d Cir.),
cert. den., 423 U.S. 1017 (1975). See also, Note, Bank-
ruptcy Law—Labor Law, Rejection of Collective Bar-
gaining Agreei-nts, supra, 22 Wayne L. Rev. at 176
(criticizing the Kevin Steel standard because it lacked
sufficient content to guide the hankruptey courts in bal-
ancing the equities). Thus in its second and definitive
examination of the issue the Second Circuit declared that
rejection would be permissable “only where it clearly ap-
pears to be the lessor of two evils and that, unless the
agreement is rejected, the [company] will collapse and
the employees will no longer have their jobs.” BRAC
v. REA Express, supra at 172. In cases involving peti-
tions to reject labor contracts made under both the super-
seded Bankruptcy Act and the new Code, the lower courts
have faithfully followed the reasoning and ruling of the
Second Circuit as expressed in REA Express. See, e.g.,
26
Matter of Brada Miller Freight Co., 16 Bnkr. Rptr. 1002,
1014 (N.D. Ala. 1982) (appeal pending in 11th Cir.);
Matter of Allied Technology, Inc., 8 Bankr. Rptr. 366, 368
(S.D. Ohio 1980); Matter of Allied Supermarkets, Inc.,
6 Bankr. Rptr. 968 (E.D. Mich. 1980); Bohack Corp. v.
Local Union No. 807, 431 F. Supp. 646 (E.D. N.Y.), aff'd,
567 F.2d (2d Cir. 1977), cert. den., 439 U.S. 825 (1978) ;
In re Alan Wood Steel Co., 449 F. Supp. 165, 169 (E.D.
Pa. 1978), appeal dismissed, 595 F.2d 1211 (3d Cir. 1979);
In re Penn Fruit Co., 92 L.R.R.M. (BNA) 3548 (E.D. Pa.
1976); In re Studio Eight Lighting, 91 L.R.R.M. (BNA)
2429 (E.D. N.Y. 1976): In re David Rosow, Inc., 106
L.R.R.M. (BNA) 2842, 2843 (Bankr. D. Conn. 1981); In
the Matter of the Connecticut Celery Co., 106 L.R.R.M.
(BNA) 2847 (Bankr. D. Conn. 1981).*
Unmoved by the prospect of this nation’s workers inno-
cently losing pension, welfare and seniority rights as a con-
sequence of often incompetent management, and uncon-
vinced by the numerous decisions of the federal courts, the
Third Circuit rejected the two-step test formulated in REA
Express. Describing REA Express as the “illegitimate pro-
geny” of Kevin Steel, the Third Circuit criticized the Sec-
ond Circuit for “trampling upon the grave” of Kevin Steel
(13a, n.11). In place of the allegedly illegitimate REA Er-
* The tension between the labor and bankruptcy laws was also
raised in Local Joint Executive Board v. Hotel Circle, Inc., 612
F.2d 210 (9h Cir. 1980). In that case the issues were whether
a court even had the authority to reject a labor contract and
whether a receiver had the power to enter into a long-term labor
contract. The Ninth Circuit ruled that a court did have the
authority to reject a labor contract but expressly stated that it
was not deciding what the standard for rejection would be.
Local Joint Bd. v. Hotel Circle, 613 F.2d at 213 n.2. In the
instant case the petitioner acknowledges that a court does have the
Ninth Circuit's decision is obviously not instructive. In sum, the
Hotel Circle case is of no heuristic value here.
27
press standard, the Third Circuit reverted to the lax and
vague “weighing of equities” test.
The Third Cireuit’s perception of the manner in which
the equities should be balanced is illuminating, and dis-
heartening. The court explained that, in its view, em-
ployees who have given years of service to a company in
the expectation that they would be able to retire with a
decent income would be willing to completely surrender
those benefits simply to keep their jobs (17a). In language
redolent of the eighteenth century, the Third Circuit opined
that a person would rather work without any fringe bene-
fits than not work at all (17a, n.13). This mean-spirited
ideology is not only anachronistic, it is unnecessary.
To be sure, a job without benefits is better than no
job at all, but the issue here is whether and when the em-
ployee should be compelled to face that harsh choice. The
entire point is that the worker should not be confronted
with that sad selection unless it is absolutely unavoidable.
Indeed, that is the purpose and fairness of the REA Er-
press test, and conversely, that is the problem and inequity
of the Third Cireuit’s test. Under REA Express a debtor
company can obtain rejection of the collective bargaining
agreement, but only after it demonstrates that the choice
is truly between rejection (and losing all benefits) or los-
ing all jobs. Plainly stated, the REA Erpress stands for
this principle: where a debtor company can continue to
operate without requiring that workers surrender accrued
benefits and work without rights, then fairness and de-
eency preclude a court from approving rejection and de-
priving those workers of their pension, welfare and sen-
iority rights. Contrary to this, the Third Cireuit’s for-
mula would allow the utter destruction of essential earned
benefits even though it is unnecessary to the debtor com-
pany’s continued existence.*
*The foregoing discussion only reinforces the petitioner’s
argument that rejection of a labor contract under §365(a)
(Footnote continued on following page)
The mere statement of the two standards would seem to
compel the choice: should this Court condone the unneces-
sary derogation of accrued pension, welfare and seniority
rights simply to ease the profit picture of a company in
bankruptcy or should this Court hold that the destruction
of such vital rights may occur only where truly necessary
to the continued operation of the company and the exist-
ence of jobs. While it may be regrettable that the Second
Circuit did not adequately articulate the appropriate stand-
ard in its first grapple with this issue, that should not de-
tract from the propriety and soundness of its subsequent
rulings. Though repetition does not create validity, the
widespread adoption by the lower courts of the REA Ex-
press standard serves to confirm the correctness of that
test. Rather than trampling on Kevin Steel, REA Express
improved upon it.
Moreover, the uniform adoption and application of the
REA Expres test by the lower courts undermines the
Third Cireuit’s concern that a bankruptcy court would
be unable to predict whether rejection is necessary to
avoid the imminent collapse of the company (l4a). The
bankruptcy and district courts are intimately involved in
the bankruptcy process and constantly make assessments
regarding the needs and abilities of debtors. The fact
that the lower courts throughout the nation have expressly
accepted and successfully employed the REA Express test
lays to rest the fear that that test is unworkable. The
lower courts have found the REA Express both fair and
practical.
(Footnote continued from preceding page)
should not be considered unless the company has first complied
with the provisions of the NLRA. As explained above, §8(d)
allows the parties the opportunity and right to modify the col-
lective bargaining agreement so as to protect fundamental benefits,
such as pensions, while eliminating or reducing other costs. This
ability to modify a contract so as to simultaneously protect the
workers and permit the company to obtain a veable con-
tract is not available under §365(a), which is an all or nothing
proposition.
29
The Third Cireuit’ refusal to accept the REA Express
standard has created a direct conflict between the circuits
on an issue of tremendous and growing significance
throughout the country. It is respectfully but urgently
requested that this Court review the Third Cireuit’s de-
cision and finally resolve this matter.
CONCLUSION
For all of the foregoing reasons, it is respectfully
submitted that this petition for a writ of certiorari to
the United States Court of Appeals for the Third Circuit
should be granted.
Respectfully submitted,
James R. Zazzait,
Counsel of Record for Petitioner,
Local 408, 1.B.T.
Zazzaul, Zazzat1 & Kroit,
Attorneys for Petitioner.
Kewnneta I. Nowak,
On the Petition.
APPENDIX A
Opinion of the United States Court of Appeals for the
Third Circuit
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Nos. 81-2140 and 81-2238
In Re: BILDISCO, A General Partnership of
the State of New Jersey,
Local 408, international Brotherhood
of Teamsters, Chauffeurs, Warehousemen
and Heipers 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
v.
BILDISCO AND BILDISCO,
DEBTOR-IN-POSSESSION,
Respondent
LOCAL 408, INTERNATIONAL BROTHERHOOD OF
TEAMSTERS, CHAUFFEURS, WAREHOUSEMEN
AND HELPERS OF AMERICA,
Intervenor
Nationa! Labor Relations Board
Application for Enforcement
Argued March 19, 1962
Betore: ALDISERT. VAN DUSEN. and GARTH.
Circuit Judges
» st. 3) F....dhlUCU F.C ROOF!
Appendiz A
Kenneth I. Nowak, Esquire (Argued)
Zazzali & Kroll
Gateway |
Newark, New Jersey 07102
Of Counsel:
Albert G. Kroll, Esquire
Counsel for Local 408,
International Brotherhood of Teamsters,
Chauffeurs, Warehousemen and Helpers
of America, Appellant in No. 81-2140
and as Intervenor in No. 81-2238
James Callear, Esquire (Argued)
Margery E. Lieber, Esquire
Deputy Assistant General Counsel!
for Special Litigation
William A. Lubbers, Esquire
General Counsel
John E. Higgins, Jr., Esquire
Deputy General Counsel
Robert E. Allen, Esquire
Acting Associate General Counsel
Elliott Moore, Esquire
Deputy Associate General Counsel
National Labor Relations Board
Washington, D.C. 20570
Counsel for National Labor Relations
Board, Petitioner in No. 81-2238 and
as Intervenor in No. 81-2140
Jack M. Zackin, Esquire (Argued)
Ravin, Katchen & Greenberg, P.A.
744 Broad Street
Newark, New Jersey 07102
Counsel for Bildiscu and Bildisco.
debtor-in-possession, Appellee in
No. 81-2140 and Respondent in
No. 81-2238
3a
Appendiz A
OPINION OF THE COURT
ALDISERT, Circuit Judge.
In these consolidated proceedings we are required
to accommodate th tension be:ween two important as-
pects of our national policy, represented by the National
Labor Relations Act and the Bankruptcy Reform Act of
1978. Specifically, we must decide whether the bank-
ruptcy court erred in permitting a debtor-in-possession
to reject a collective bargaining agreement as an execu-
tory contract. We also must consider the National Labor
Relations Board's application for enforcement of its order
determining that the same debtor-in-possession commit-
ted an unfair labor practice by unilaterally changing the
terms of the agreement. We vacate the judgment in the
appeal at No. 81-2140 and remand for further proceed-
ings. Because the NLRB both erred in its choice and ap-
plication of legal precepts and abused its discretion,
however, we deny the application for enforcement at No.
81-2238.
Bildisco, a New Jersey partnership engaged in sell-
ing 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 partnership as a
debtor-in-possession and authorized it to oferate 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 chap-
ter, and to such limitations or conditions as the court pre-
scribes, a debtor in possession shall have all the rights, other
than the right to compensation under section 330 of this title,
and powers, and shall perform all the functions and duties. ex-
cept the duties specified in sections 1106 (a2), (3), and (4) of
this tide, of a trusiee serving in a case under this chapter.
4a
Appendiz A
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 em-
ployees. On January 5, 1981, the debtor-in-possession
sought bankruptcy court permission to reject the
collective bargaining agreement under 11 USC.
§365(a), which permits rejection of executory 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 con-
cerned about the “union situation” and that by operating
without the collective 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
Valente, but it did not offer any other evidence concern-
ing the effect of rejection on Bildisco’s employees.
The bankruptcy judge, without expressly articulat-
ing the standard that he applied,* granted permission to
2. Valente estimated that Bildisco would be increasing the
number of employees to ten as the off-season ended. and his projec-
tions of the savings that would be realized if the agreement were
rejected are predicated on the costs of salaries and benefits to ten
employees.
3. The bankruptcy judge concluded his consideration of the
standard to be applied as follows
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 | am going te have to allow the
motion of the debtor.
5a
Appendiz A
reject on January 15, 1981, retroactive to the date imme-
diately 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 bank-
ruptcy judge had not identified the test he had used, the
district court held that the permission to reject was prop-
er 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 bargaining
agreement. After investigating the charges, 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 prac-
tices in violation of sections 8(a)1) and (5) of the Na-
tional Labor Relations Act by making unilateral changes
in the collective bargaiiuing agreement. 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 ad-
mitted. On September 24, 1980, a Board agent advised
Valente of the company’s obligation to answer the com-
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 | 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 | have to gramt the motion to reject.
App. at 64-65.
6a
Appendiz A
plaint. On October 8, the General Counsel issued an
amended complaint reflecting additional union allega-
tions that the company had failed to pay vacation bene-
fits to its employees. On October 27, 1980, a Board attor-
ney 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 an-
swer was filed.
On January 27, 1981, twelve days after the bank-
ruptcy court authorized rejection of the collective bar-
gaining agreement, the Board’s General Counsel moved
for summary judgment based on Bildisco’s failure to an-
swer the amended complaint. Two days later Bildisco re-
sponded with a request for a 60-day stay of proceedings
so that it could apply for bankruptcy court permission to
retain special labor counsel. The General Counsel op-
posed 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 de-
lay in filing an answer was caused by the disruption of
Chapter 11 proceedings and that it had not yet received
bankruptcy court permission to retain special labor
counsel.‘ It also informed the Board that the bankruptcy
court had granted its motion for permission to reject the
collective bargaining agreement. Noting the retroactive
effect of the rejection, the debtor-in-possession argued
that no contract existed between it and the union after
7a
Appendiz A
mary 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 delinquent contributions and
payments plus interest, to honor the terms of the
collective bargaining agreement, and to post appropriate
notices. The NLRB made a “finding of fact” that the
debtor-in-possession “is, and has been at all times mate-
rial herein since April 17, 1980, an alter ego in bankrupt-
cy to Bildisco.” App. at 131.° The Board subsequently
applied 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 ap-
peal from the district court order, and the union has
intervened in the Board’s application for enforcement.
We will consider the appeal and the application for en-
forcement in turn.
II.
The rejection of a collective bargaining agreement
under the new Bankruptcy Code, which implicates a sig-
nificant 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 di-
rection and the decisions of other courts interpreting the
equivalent section of the former Bankruptcy Act and the
relevant provisions of the NLRA.
A.
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 viability.
5 The respondent filed 4 motion for reconsideration accompa-
med by an answer to the Board's complaint. the Board rejected the
motion because it was postmarked two davs after the deadline for
such motions. See 29 C FR. $102 48d 2)
8a
Appendiz A
The purpose of a business reorganization case,
unlike a liquidation case, is to restructure a
business's finances so that it may continue to oper-
ate, provide its employees with jobs, pay its credi-
tors, and produce a return for its stockholders. The
premise of a business reorganization is that assets
that are used for production in the industry for
which they were designed are more valuable than
those same assets sold for scrap. Often, the return
on assets that a business can produce is inadequate
to compensate those who have invested in the busi-
ness. 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 economically efficient to reorganize than to
liquidate, because it preserves jobs and assets.
H.R. Rep. No. 595, 95th Cong., Ist Sess. 220 (1977), re-
printed in 1978 U.S. Code Cong. & Ad. News 5963,
6179. If a business can be turned around by reorganiza-
tion, 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 benefit from its pro-
duction. Thus the debtor, its creditors and employees,
and the public at large benefit from the business’ surviv-
6. Experience under the Bankruptcy Act demonstrated that
from a sample of bankruptcy cases, priority creditors usually re-
ceived full payment in a successful reorganization but realized less
than one-third of the amount of thetr claims in a straight bankrupt.
cy Unsecured creditors realized only a median nineteen percent
9a
Appendix A
al. Under the congressional schema, this goal is promot-
ed by numerous specific mechanisms, including contin-
ued operation in the hands of the debtor-in-possession or
trustee, under supervision of the court, with a “breath-
ing spell” free from the collections efforts of creditors.
Another mechanism is to allow the debtor-in-possessin
to reject executory contracts that would burden the
estate. See 2 Collier on Bankruptcy 99365.01.-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, 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 executory
contract or unexpired lease of the debtor.”’ Under Chap-
ter 11 a debtor-in-possession has essentially the same
powers as a trustee,® and it therefore may reject execu-
tory contracts with the authorization of the bankruptcy
court.
B.
This cz-e places the statutory policies underlying
Chapter 11 in tension with our national labor policy, as
expressed in the National Labor Relations Act. Broadly
7. 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 imposed
upon it by this chapter—
(1) permit the rejection of executory contracts of the debt-
or, upon notice to the parties to such contracts and to such oth-
er parties in interests as the court may designate.. . .
Bankruptcy Act of 1898, §313. 11 U.S.C. §713 (1976) (repealed).
8. 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
Appendiz A
stated, that policy is to promote industrial peace by facili-
tating 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 specific 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 “ter-
minate or modify” the agreement without following a
specified procedure.® Our task is to reconcile the appar-
ent conflict between the NLRA and the Bankruptcy
Code and 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 executory
9. 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 con-
er
(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,
(3) notifies the Federal Mediation and Conciliation Service
and... . any State or Territorial agency established to me-
diate 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 contract, whichever occurs
later: . . . [T)he duties so imposed shall not be construed as
reql] 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 modification is to be-
come effective before such terms and conditions can be re-
opened under the provisions of the contract.
29 U.S.C. §158(d).
lla
Appendiz A
contracts. Indeed, the few inferences of congressional
intent that may be gleaned from the Code and its legisla-
tive history are to the contrary. First, notwithstanding
several judicial decisions holding collective bargaining
agreements susceptible to rejection.'° Congress afford-
ed collective bargaining agreements no special treat-
ment. Significantly. Congress did provide detailed provi-
sions for acceptance of executory contracts such as
shopping center leases, §365(b)(3), and regarding trans-
actions in commodities futures contracts, §§765, 766.
Moreover, one particular species 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 agree-
ment that is subject to the Railway Labor Act (45
U.S.C. 151 et seq.) except in accordance with sec-
tion 6 of such Act (45 U.S.C. 156).
11 U.S.C. §1167. The sheer complexity of the Bankrupt-
cy Reform Act might preclude our use of §1167 as de-
finitive proof that every other collective bargaining
agreement may be rejected, but the section permits an
inference that, with this one exception. Congress did not
intend to distinguish collective bargaining agreements
from executory contracts in general.
IV.
Having determined that §365(a) authorizes the
bankruptcy court to permit the rejection of collective
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, 1073 (1975); Shopmen’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), affd, 613 F.2d 210 (9th Cir 1980)
12a
Appendiz A
bargaining agreements, we now turm 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 developed in Part
VI-A, infra, a debtor-in-possession is a new entity, sepa-
rate 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 bankruptcy court to permit rejection of a
collective bargaining 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.
A.
The usual test for rejection of an executory contract
is simply whether rejection would benefit the estate, the
“business judgment” test. See 2 Collier on Bankruptcy
9365.03 (15th ed. 1981). 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, however, require a more stringent exami-
nation 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 bar-
gaining agreement requires “ ‘thorough scrutiny, and a
careful balancing of the equities on both sides.’ 519
F.2d at 707 (quoting In re Overseas National Airways,
Inc., 238 F.Supp. 359, 361 (E.D.N.Y. 1965)).
We accept this formulation of the appropriate rela-
tionship between the competing statutory policies. It ac-
commodates the statutory polices of the Labor Act by de-
manding a greater evidentiary showing than for
13a
Appendiz A
rejection of a typical executory contract, but it does not
erect impossible barriers to rejection of labor contracts in
violation of the policies underlying Chapter 11. It plots a
middle course between the possible extremes, requiring
a sensitive weighing of the competing 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 in-
stead replace its “balancing of the equities” with a test
predicating permission to reject on a showing “that an
onerous and burdensome executory collective bargain-
ing agreement will thwart efforts to save a failing carrier
in bankruptcy from collapse.” Brotherhood 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).'' According 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.” Id. at 172. The district court
in this case and the court in In 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.
11. They reflect a phenomenon that our distinguished. former
colleague, the late William H. Hastie. called “trampling upon
ves” adding a substanual gloss to a previously stated holding
aE
lumits of its capacity to unify and rationalize " B_ Cardozo. The Na-
ture of the Judicial Process 3] (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
l4a
Appendiz A
(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 bargaining
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 weil beyond the “balancing of equities” required by
Kevin Steel. We reject this more stringent test for two
discrete but related reasons: first, for the pragmatic rea-
son that it may be impossible to predict the success vel
non of a reorganization until very late in the arrange-
ment proceedings; and second, for the prudential con-
sideration that the imposition of such a test unduly ex-
alts the perpetuation of the collective bargaining
agreement over the more pragmatic cunsideration 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 bank-
ruptcy court. Thus almost two years after the petition for
reorganization was filed and over a year after the court
granted the debtor-in-possession permission to reject
the agreement, there is stil] no assurance that Bildisco
will successfully reorganize. We simply do not and can-
not 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 reorganization will be impossible absent reyec-
tion of the labor contract. In the common law tradition
the acceptability or durability of a legal rule is directly
dependent upon its utility. The rule urged upon us bv
15a
Appendia A
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 reorga-
nization 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 barrier 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 together with a suc-
_cessful reorganization is surely the best of possible
worlds; but given the inevitable potential for conflict be-
tween these goals we think it preferable that jobs be pre-
served through rejection of 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 careful
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
léa
Appendiz A
the debtor and the adequacy of the relief employees
might obtain through the claims procedures. '*
B.
We are satisfied that Kevin Steel, isolated from its il-
legitimate progeny, provides the appropriate framework
for an intelligent and equitable approach to the problem
because it gives collective bargaining agreements a
measure of protection beyond that available under the
business judgment test without unduly advancing the
interests served by the Labor Act over the other interests
of the employees and those of the debtor's other credi-
tors. We believe that the debtor-in-possession must first
demonstrate that the continuation of the collective bar-
gaining agreement would be burdensome to the estate;
that once this thresnold determination has been made
the debtor-in-possession must make a factual presenta-
tion 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 consider the nghts of covered employees as sup-
ported by the national labor policy as well as the possible
“sacrifices which other creditors are making” in the ef-
fort to bring abcut a successful reorganization, Group of
Institutional Investors, 318 U.S. at 550; and that the
court must make a reasoned determination that rejection
of the labor contract will assist the debtor-in-possession or
12. Among other factors bankruptcy courts might consider in
balancing the equities are, for example. the proportion of the debt.
ar's employees covered by the collective bargaining agreement. how
those employees" a tt meng
the industry, and the goed or bed faith
the
Bargaining Agree-
ments, 81 Colum. L. Rev. 381, 401-03 (1881). The listing of these
considerations is not intended to be all-inclusive
17a
Appendiz A
the trustee to achieve a satisfactory reorganization. We
believe that particularly in a time of economic uncertain-
ty and distress an analysis following this pattern pro-
vides more protection to both employer and employee
than the test urged upon us by the union and the NLRB.”
V.
Having identified the considerations properly appli-
cable to rejections of collective bargaining agreements,
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 ar-
ticulated in REA Express and Alan Wood Steel: rejection
is permissible only if reorganization otherwise would be
impossible and if the equities favor the debtor. Counsel
for the debtor-in-possession, on the other hand, submit-
ted that collective bargaining agreements are to be treat-
ed like all other executory contracts and that rejection
13. According tu data supplied by the U.S. Department of La-
bor, as of February, 1982, 9.6 million Americans wanting to work
were unable to find jobs. This constitutes 8.8% of the work force
and an increase from 3.4% in January-March 1969, 4.6% in Octo-
ber 1973, and 5.7% in May-July 1979. Because 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 out-
side field servicemen, it is significant that 18.1% of the nation’s con-
struction 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 economy, a
bankruptcy court could properly consider that it would be in the in-
terests of the workers in a bargaining unit to be afforded the oppor-
tunity to continue to work under less generous financial benefits
than to insist upon an absolute payment of vacation benefits, pen-
sion, health and welfare benefits, and wage increases. In weighing
the equities the court could well conclude that it is in the public in-
terest for employees to work without the advantage of fringe bene-
fits than not to work at all.
18a
Appendiz A
should be permitted whenever it would benefit the
debtor.
The bankruptcy court’s bench opinion unfortunate-
ly was a woefully inadequate treatment of a sophisticat-
ed subject. It is not clear whether the bankruptcy court
chose one of the two standards 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 reversible error: (a) specific acts or
omissions by the trial court constituting legal error, (b)
properly suggested as error to the trial court, and (c), if
uncorrected 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.1l. 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 requirement affords an opportunity for
error correction and avoidance in the trial court in var-
ious 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 al ernatives 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 de-
cision and thus facilitates appellate review.
14. The district court affirmed the bankruptcy court by deter-
mining that, applying either test, the contract was appropriately re-
jected. The district court's analysis need not detain us, however, be-
cause our role as a court of review is identical to that of the district
court. Untversal Minerals, Inc. v.C. A. Hughes & Co., 669 F.2d 98,
101-02 (3d Cir. 1981).
19a
Appendiz A
Where the state of the law is not settled, and the
court of the first instance has not set forth a reasoned
elaboration for its decision, as here, an appellate court
cannot determine what motivated the trial court’s deci-
sion. 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 rea-
sons 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 instance newly formulated precepts to the facts ad-
duced. Because we have set forth in detail the appropri-
ate precepts to apply in a hitherto unsettled area of the
law, and because we do not have the benefit of an ade-
quate explanation of the trial court’s action, the prefer-
able course is to remand the proceedings for reconsider-
ation in light of the precepts we announce today.
Accordingly, we vacate the judgment of the district
court and remand to it with a direction that the cause be
further remanded to the bankruptcy judge for reconsi-
deration.
VI.
We now turn to the Board's application at No.
81-2238 for the enforcement of its summary judgment
determining that the debtor-in-possession had commit-
ted 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 administrative law
judge and a review of the record by the Board. We have
only an application for enforcement of summary judg-
ment; our denial of enforcement does not preclude the
Board from processing the charges through a full hear-
ing, guided and governed by the bankruptcy court’s de-
20a
Appendtzr A
termination on remand concerning the rejection of the
collective bargaining agreement, and by the views
which we have expressed in this opinion.
A.
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 viola-
tion 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 mat-
ter of law, a debtor-in-possession is “|a] new entity. . .
created with its own rights and duties, subject to the su-
pervision of the bankruptcy court.” Kevin Steel, 519 F.2d
at 704 (footnote omitted). A debtor-in-possession is giv-
en 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 righis 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,
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 rec-
ognize and bargain with the union, but it is not a party to
2la
Appendiz A
its predecessor's collective bargaining agreement unless
it assumes that agreement. NRLB v. Burns Security Ser-
vices, Inc., 406 U.S. 272, 284 (1972); Kevin Steel, 519
F.2d at 704. Because Bildisco as debtor-in-possession is
not a perty to the agreement with Local 408, it had the
ability to reject the agreement without following the pro-
cedures outlined in §8(d). We suggest to the NLRB that,
at least in matters within this judicial circuit, it cease op-
erating under such a fundamental misconception of the
law. Indeed, we believe that persisting in such a
misconception — one that goes to the difference be-
tween the pre-bankruptcy company which was the sig-
natory to the collective bargaining agreement and the
succeeding debtor-in-possession — is so fundamental
that this error in and of itself is sufficient reason to
refuse to enforce a summary judgment so predicated.
B.
The Board contends, however, that this court may
not consider Bildisco’s defenses to the unfair labor prac-
tice complaint because they were not urged before the
Board in a timely manner. Section 10(e) of the NLRA,
29 U.S.C. §160(e), provides that “[n]o objection that has
not been urged before the Board, its member, agent or
agency, shall be considered by the court, unless the fail-
ure or neglect to urge such objection shall be excused
because of extraordinary circumstances”; und the Su-
preme Court has consistently held that, in the absence
of extraordinary circumstances, “the failure or neglect of
a respondent to urge an objection in the Board's pro-
ceedings forecloses judicial consideration of the objec-
tion in enforcement proceedings.” NLRB v. Ochoa Fer-
tilizer 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 oper-
ations caused by reorganization proceedings, and that
this excuse would not come within §10(e)’s “extraordi-
nary circumstances” exception.
22a
Appendiz A
We hold that §10(e) is inapplicable to this case be-
cause the objection was urged before the Board at a time
when the Board couid have taken meaningful notice of
it. Inasmuch as the date of the hearing had noi yet
passed, the Board's draconian remedy was unwarranted.
We have recently observed that
an administrative agency like the NLRB, burdened
with an extremely heavy caseload, must necessarily
rely upon compliance with procedural rules to func-
tion efficiently. As part of the process, reasonable
time limitations must be set and observed. Never-
theless, there are instances where wooden and un-
reasoning insistence upon technical 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,
137 (3d.Cir. 1982). We recognize that the response 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 Consolidators, Inc. v.
NLRB, 672 F.2d 323 (3d Cir. 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 de-
spite technical and inadvertent noncompliance with pro-
cedural rules.’ ” Jd. 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 implicated in the proceedings is
itself sufficient reason for a delay. But the drastic cir-
cumstances 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
23a
Appendix A
the most distressed industries of the present recession,
and where the pre-bankruptcy company had been in ac-
tive reorganization by a debtor-in-possession for over a
year, we believe that the Board was presented 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, responding
to the Board’s order to show cause, Bildisco notified 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 failure of the
debtor-in-possession to respond to the complaint, but we
will not enforce a Board order that cavalierly refuses to
recognize an outstanding federal court order directly re-
lating to the proceedings before it. Because rejection re-
lated back to the day before the Chapter 11 petition was
filed, 11 U.S.C. §365(g)(1), no labor contract effectively
existed between the union and the debtor-in-possession,
subsequent to April i4, 1980. In its thirteen page deci-
sion and order dated April 23, 1981, however, the Board
failed even to acknowledge, much less to consider the ef-
fect of, the bankruptcy court order permitting rejection.
The Board did not explain how, as an agency of the
executive branch, it can ignore the order of a federal
court. We perceive no excuse for this disregard. It is as
much a departure from acceptabie decision-making for
the NLRB to decide a case within its competence with-
out accommodating competing principles of bankruptcy
law as it would be for a bankruptcy court to decide a la-
bor contract issue without accommodating 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 bankrupt-
24a
Appendix A
cy court order and to give some explanation why that or-
der 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 sum-
mary judgment. Because the summary judgment in-
cluded pre-petition charges as well as those relating to
activities subsequent to the filing of the bankruptcy peti-
tion, it will be for the NLRB in the first instance to sepa-
rate the two types of charges at any subsequent proceed-
ing. Where charges of unfair labor practices arise both
before and after the date of a Chapter 11 petition, the re-
jection of a collective bargaining agreement would not
affect the obligations of the employer under §8(d) prior
to the date of the petition. We agree with the Board that
a monetary claim resulting from a Board order in such
circumstances 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
bankruptcy 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 re-
jected agreement.
VIL.
The judgment of the district court at No. 81-2140
will be vacated and the cause remanded to it with a di-
rection of a further remand to the bankruptcy judge for
reconsideration in light of the foregoing The NLRB's
25a
Appendiz A
application for enforcement at No. 81-2238 will be de-
nied without prejudice, for the reasons hereinabove
expressed.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
26a
APPENDIX B
Judgment of the United States Court of Appeals for the
Third Circuit
UNITED STATES COURT OF APPEALS
For tHe Txurirp Circuit
Nos. 81-2140 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. 812140
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.
POSSESSION,
BILDISCO AND BILDISCO, DEBTOR-IN-
Respondent
27a
Appendiz B
LOCAL 408, INTERNATIONAL BROTHERHOOD OF
TEAMSTERS, CHAUFFEURS, WAREHOUSEMAN
AND HELPERS OF AMERICA,
intervenor
National Labor Relations Board
Application for Enforcement
Present: Aupisert, Van Dusen and Gara, Circuit 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 erdered and
adjudged by this Court that the judgment of the said Dis-
trict Court entered May 6, 1981, be, and the same is here-
by 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 National
Labor Relations Board’s application for enforcement, filed
August 6, 1981, be, and the same is hereby denied.
Costs taxed against petitioner in C.A. No. 81-2238.
Attest:
Sally Mrvos
Clerk
June 17, 1982
28a
APPENDIX C
Opinion of the United States District Court for the
District of New Jersey
UNITED STATES DISTRICT COURT
For THE District or New JERSEY
Civil Action No. 81-513
+
In Re:
BILDISCO, A General Partnership of the
State of New Jersey,
- =
—
May 4, 1981
Trenton, New Jersey
BErore:
The Honorable Anne E. Thompson, U.S.D.J.
APPEARANCES:
Zazzali, Zazzali & Kroll, Esqs.
By: Albert G. Kroll, Esq.
For Local 408
Ravin, Katchen & Greenberg, Esqs.
By: Jack M. Zackin, Esq.
For the Debtor
The Court: This is an appeal from an Order of the
United States Bankruptcy Court for the District of New
29a
Appendiz C
Jersey filed on January 15, 1981. In that order, the Bank-
ruptey Court granted the motion of Bildiseo, Debtor in
Possession, to reject a May 1, 1979 collective bargaining
agreement between Bildisco and Local 408, International
Brotherhood of Teamsters, 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 aflirm, modi-
fy or reverse a referee’s judgment or order, or re-
mand with instructions for further proceedings. The
court shall accept the referee’s findings of fact unless
they are clearly erroneous, and shall give due re-
gard to the opportunity of the referee to judge the
credibility of the witnesses.
“Tf there is a reasonable basis in the record for a bank-
ruptcy judge’s ultimate findings of fact, a reviewing court
cannot substitute its own ultimate findings of fact simply
because it regards its views as effecting a more desirable
result than that reached by the bankruptcy judge.” In re
Botany Industries, 463 F. Supp. 793, 795 (ED Pa 1978);
In re Hollock, 1 B.R. 212, (M.D. Pa. 1979). As 4 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 be committed.
United States v. United Gypsum Co., 333 U.S. 364, 395
(1948); In re Knight, 421 F. Supp. 1387, 1390 (M.D.La.)
(1976).
30a
Appendix C
Under Section 365 of the Bankruptcy Code, 11 U.S.C.
§365, a trustee or a debtor in possession is 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 Prod-
ucts, 519 F. 2d 698 (2d Cir. 1975) was the leading opinion
dealing with the rejection of collective bargaining agree-
ments under the old Bankruptey Act. Under the New Bank-
ruptcy Code, it is not settled whether the standards de-
veloped 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 new standards, 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 agree-
ments will not be treated any differently under 4365
than any other executory contracts. This being so, the
so-called “business judgment test” for their rejection
would apply. Under this test, “(i)t is enough, if, as a
matter of business judgment, rejection of the burdenome
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 justifica-
tion for the Bankruptcy Court to make the finding that
a rejection by the debtor of the collective bargaining agree-
ment would be a sound exercise of its business judgment.
Rejection would result in a savings of approximately
$100,000. (T. 7) This alone would appear to justify re-
jection under the “business judgment” test.
3la
Appendiz C
On the other hand, it may be that Congress intended
to preserve the special treatment accorded to collective
bargaining agreements under former Section 313, (now
365). As set forth in Kevin Steel and its progeny,
The cases suggest that a two step analysis be em-
ployed by the bankruptcy court in deciding whether
to permit rejection of a collective bargaining agree-
ment ... (citations omitted) . . . First, the court
should determine that the agreement is onerous and
burdensome to the estate, so that failure to reject
will make a successful arrangement 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 firding
as to the test to be applied in the rejection of th. collec-
tive 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 findings required by the
Kevin Steel test, and therefore, we cannot say that its
ruling was “clearly erroneous.”
First, the Court heard testimony that the creditors who
approved the plaa believed that the rejection of the un-
ion contract was “highly involved” with the success of
the plan. (Tr. 8) The Court itself noted that the testi-
mony 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 collec-
tive bargaining agreement was burdensome to the debtor.
32a
Appendix C
Second, the Court did weigh the equities in this matter.
It noted that
the union and the employees have a right to claim
damages as a result of the rejection of the contract.
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 reveals
that the Court found that the collective bargaining agree-
ment was burdensome to the debtor, and that it would
be to his distinct advantage to reject the agreement. Fur-
theremore, the Court found that although the union and
the employees would suffer injury as a result of the re-
jection, given their right to seek damagex, 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 uncontradicted by
the opposing side—to support the order below, we do
not believe that any error was committed by the Bank-
ruptcy Judge. Accordingly, the order will be affirmed.
The Court will enter an appropriate form of order.
33a
APPENDIX D
Judgment of the United States District Court for the
District of New Jersey
UNITED STATES DISTRICT COURT
For THe District or New JERSEY
Civil Action No. 81-513
”™
>
Is THE MatTrTer oF:
BILDISCO, 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 appeal
from an order granting the motion of the Debtor in Pos-
session, Bildisco, to reject the Executory Contract dated
May 1, 1979 with Teamsters Union Local No. 408 brought
by Local 408, International Brotherhood of Teamsters,
Chauffeurs, Warehousemen & Helpers of America, by
Zazzali, Zazzali & Kroll, P.A., Albert G. Kroll, Esquire,
appearing; and Ravin, Katchen & Greenberg, P.A., coun-
sel 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.
34a
Appendix D
OrvereD that the order entered in this matter on Janu-
ary 15, 1981, granting the motion of the debtor in posses-
sion to reject the Executory Contract be and hereby is
affirmed.
Awnye E. Tuompson, U.S.D.J.
Original Fled
May 6, 1981
Ancevo W. Locascio, Clerk
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.