Petition for Writ of Certiorari — International Ass'n of Machinists & Aerospace Workers v. REA Express, Inc.

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SUPREME COURT, UO PTT

IN THE

Supreme Court of the United States

Ocroper Term, 1975

No. 75-

>

INTERNATIONAL ASSOCIATION OF MACHINISTS and

Agrrospace Workers, Al*L-C1O,

Petitioner,

—_—V-

REA Express, Ixc., Debtor, REA Express, Ixc.,

Debtor-in-Possession,

Respondent.

,

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

SrepHen C. Viapeck

Vuapeck, Evias, Vuapeck &

Lewis, P.C,

Attorneys for Petitioner

1501 Broadway

New York, New York 10036

(212) 221-2550

and

Piato FE. Parrs

1300 Connecticut Avenue, N. W.

Washington, D. C. 20036

General Counsel, International

Association of Machinists and

Aerospace Workers, AFL-CIO

(202) 785-2525

StepHen C. ViapEcK

SHELDON ENGELHARD

Rosert L. Javuvtis

Of Counsel

ee

PPR

TABLE OF CONTENTS

i gente cn SMES RCN BRIELLE PT Se ON

A Na REI Sa ees OE Ts oa ae ia cs

Question Presented for Review .............e.ececececeeeceseeeneeenes

et EAT Re SOO PPL cy bare ci ayy

Reasons For GRANTING THE WRIT:

l.

be

The decision below conflicts with the national

labor policy of stabilizing labor relations through

the maintenance of collective bargaining agree-

ments in industries subject to the Railway Labor

,* ee ciitinecniaiadipuechtienbvanics aeaibcapteesaKieilonkio

The decision below conflicts with the national

labor policy of distinguishing collective bargain-

ing agreements from other types of contracts ....

The decision below conflicts with the clear con-

gressional intent of the Railway Labor Act to

require debtors-in-possession to follow its pro-

cedures in modifying or terminating collective

bargaining agreements ...0...................ccccceceeeeeeeeeeees

RNAS dt es One Nas eahs Near Sm SS Tae ay AS

om yg hty RIOTS PRR IP AULA ARNE eat egl se

ME ONE i Ne Se

11

INpex oO Crrarions

Cases:

Brotherhood of Loeomotive Eneimeers vo Baltimore &

VAG

Ohio RO Co, 82 LSS 284 Ces) rT

Chieaso & NOW. Ryo Conv. United Transportation

Union, 402 US. O70 CI8Th) 0

Detromt and Toledo Shore Line Railroad Company vy,

United Transportation Union, 896 US. Te (196e) 10

NLRB vy. Burns International Seeurity Serviees, Ine.

4006 US. 272 CINF2) 13

REA Express, Ine. v. Brotherhood of Railway and Air

line Clerks, 499 Pild 226 (oth Cir. 1972), eert. den.

409 US. 284 (172) i)

Shopmen’s Loeal Umon No. 455, et al. and NLRB v.

Kevin Steel Produets, Ine. 519 Bid Gos (2d Cir,

1979) S

Slocum vo Delaware, Lo & Wo OR. Coe. 389 US. 28e

(1990) Ww

Textile Workers Union of America vy. Lincoln Mills of

Alabama, 853 U.S. 448) (1997) 11

Umited Steelworkers Union of America v. Warrior &

Gulf Navigation Co., 368 U.S. S74 (1960) 1

STATUTES:

Bankruptey Act (11 U.S.C. §§T701, ef seq.) passim

Railway Labor Act (45 U.S.C. §S1SL, ef seg.) © passim

Meee SAROa

»

In THE

Supreme Court of the United States

Ocronern ‘Team, 1975

No. 75-

- >

INTERNATIONAL Association or Maciinists and

Arrospacek Workers, ABFL-CLO,

Petitioner,

—

REA Express, Ixc., Debtor, REA Express, [Ne.,

Debtor-in- Possession,

Respondent.

—

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

The petitioner, International Association of Machinists

and Aerospace Workers, AFL-CLO (“LAM”), respectfully

prays that a writ of certiorari issue to review the judgment

and decision of the United States Court of Appeals for the

Second Cireuit entered on August 27, 1975.

Opinions Below

The opinion of the Court of Appeals, not vet officially

reported (unofficially reported at 90 LRRM 2579), appears

in Appendix “A” hereto. The opinion and order of the

United States District Court for the Southern District of

New York, on appeal from a Bankruptey Judge of that

Court, entered on May 19, 1975, not yet officially reported

(unofficially reported at 88 LRRM 2495), appears in Ap-

NT estale Dale as

Gere

pendix “B” hereto. The opinion and order of Bankruptcy

Judge John J. Galgay of the District Court, entered on May

2, 1975, also not yet officially reported, appears in Appendix

“C” hereto.

Jurisdiction

The judgment of the United States Court of Appeals

for the Second Circuit was entered on August 27, 1975.

This petition was filed within ninety days of that date.

The jurisdiction of this Court is invoked pursuant to 28

U.S.C. §1254(1).

Question Presented for Review

Does $313(1) of the Bankruptcy Act allow a District

Court to permit a debtor-in-possession of the business of a

carrier subject to the provisions of the Railway Labor Act

to reject a collective bargaining agreement in disregard of

the requirements of the Railway Labor Act relating to the

alteration of the status quo by changing rates of pay, rules,

or working conditions of employees of a carrier where the

term “carrier,” as defined in the Railway Labor Act, clearly

includes a debtor-in-possession?

Statutes Involved

This matter primarily involves provisions of the Rail-

way Labor Act (45 U.S.C. §§151, et seg.) and of Chapter X1

of the Bankruptey Act (11 U.S.C. §§701, et seq.) as follows:

Section 2, First, of the Railway Labor Act (45 U.S.C.

$152, First) reads as follows:

3

“It shall be the duty of all carriers, their officers, agents

and employees to exert every reasonable effort to

make and maintain agreements concerning rates of

pay, rules, and working conditions, and to settle all

disputes, whether arising out of the application of

such agreements or otherwise, in order to avoid any

interruption to commerce or to the operation of any

carrier growing out of any dispute between the carrier

and the employees thereof.”

Section 2, Seventh, of the Railway Labor Act (45 U.S.C.

§152, Seventh) reads as follows:

“No carrier, its officers, or agents shall change the rates

of pay, rules or working conditions of its employees,

as a class, as embodied in agreements except in the

manner prescribed in such agreements or in section

156 of this title.”

Section 6 of the Railway Labor Act (45 U.S.C. $156)

seads as follows: ‘

“Procedure in changing rates of pay, rules, and work-

ing conditions.

“Carriers and representatives of the employees shall

give at least thirty days’ written notice of an intended

change in agreements affecting rates of pay, rules,

or working conditions, and the time and place for

the beginning of conference between the represen-

tatives of the parties interested in such intended

changes shall be agreed upon within ten days after

the receipt of said notice, and said time shall be

within the thirty days provided in the notice. In every

4

3

%

%

case where such notice of intended change has been

given, or conferences are being held with reference

b thereto, or the services of the Mediation Board have

3 been requested by either party, or said Board has

H proffered its services, rates of pay, rules or working

‘ conditions shall not be altered by the carrier until

¥ the controversy has been finally acted upon, as re-

3 quired by section 155 et this title, by the Mediation

5 Board, unless a period of ten days has elapsed after

iy termination of conferences without request for or

‘ proffer of the services of the Mediation Board.”

:

‘ Section 1, First, of the Railway Labor Act (45 U.S.C.

i S151, First) reads in pertinent part as follows:

: “The term ‘carrier’ includes any express company, * * *

Sa

subject © ime Interstate Commerce Act, * * * and any

receiver, trustee, or other individual or body, judicial

or otherwise, when in the possession of the business

of any such ‘carrier’ * * *.”

Section 313(1) of Chapter XI of the Bankruptey Aet

(11 U.S.C. §718(1)) reads in pertinent part as follows:

Ge et WBS fae tila Te BARA OPI

“Upon the filing of a petition, the court may * * *—

‘(1) permit the rejection of executory contracts of

the debtor, upon notice to the parties to such contracts

and to such other parties in interest as the court may

designate ;’.”

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Statement of the Case

The petitioner, LAM, is a labor organization which rep-

resents those employees of the respondent, REA Express,

Inc. ("REA"), who are engaged in the maintenance, ser-

vieing and repair of its mechanical and automotive, truck

and trailer equipment. REA is engaged in both the surface

and air transportation of freight, and is a “carrier” sub-

ject to all provisions of the Railway Labor Act (45 U.S.C.

SOIDL, et seq.) REA Express, Ine. v. Brotherhood of Rail-

way and Airline Clerks, 459 Ftd 2260 (oth Cir, 1972),

cert. den., 409 U.S. 892 (1972).

IAM and REA have been parties to collective bargaining

agreements governing the rates of pay, rules, and work-

ing conditions of the carrier's employees since a time

prior to the enactment of the Railway Labor Act. The

collective: bargaining agreement at issue in this matter

contains, among other items, provisions covering job

seniority, equal opportunity in employment, health and

welfare benefits and a detailed grievance procedure, The

procedures for the resolution of grievanees, culminating

in arbitration, are required by Section 3 of the Railway

Labor Act (45 U.S.C. $155).

The collective bargaining agreement at issue affects ap-

proximately 330 employees. According to its express terms

(Rule 59), the agreement was to “remain in effeet until

June 1, 1876, and thereafter changed or modified in acecord-

ance with the provisions of the Railway Labor Ac: as

amended.” Section 2, Seventh, of the Railway Labor Act

specifically controls the modification of collective bargain-

ing agreements subject thereto, and provides that such

6

agreements may not be changed by a carrier exeept in

accordance with the terms of the agreements or Section 6

of the Railway Labor Aet (45 UOS.C) S1S6)> Section 6

requires at least thirty days’ written notice ef an in

tended change in agreements, conferences between the

parties, and mediation by the National Mediation Board, if

necessary, ‘These mandatory procedures must be exhausted

before either a carmer or the representative of its em

plovees may inveke self-help to revise or terminate the

provistons of a collective bargaining agreement, Brother

hood of Locomotive Engineers v. Baltimore & Ohio R. Co.,

872 US. 284 (1968). ‘Phe procedures set forth in Section 6

of the Railway Labor Aet are appleable to any receiver,

trustee, or other individual or body, pudieml or otherwise,

When in the possession of the business of a carrier. Seetion

1, First, of the Railway Labor Act (4o US.C. S151, First).

On February 18, 1975, REA filed a petition with the Dis

triet Court pursuant to the provisions of Chapter XI, 6322

of the Bankruptey Aet (LE UAS.C. Q722, ef seq). By order

of that same date, the District Court authorized the debtor,

REA, to continue in the possession and operation of its

business, On February 24, L975, REA unilaterally reduced

the wages of emplovees covered under the LAM collectiv:

bargaining agreement by 10°, designating this action as a

wage deferral, No notice of this modification of the agree-

ment was served upon LAM as required by Section 6 of the

Railway Labor Act, nor were any of the other proceedures

contained in that section followed by REA.

On March 24, 1975, REA tiled a motion with the Bank.

ruptey Court, pursuant to Seetion 313(1) of the Bank

ruptey Aet (1L U.S.C. §713(1)), for an order permitting

— eae < ha 97 tt POE ANAL LEELA LLL ELLE ALLELE A LEP EPA

7

the rejection of its collective bargaining agreement with

the LAM, as well as its agreement with the Brotherhood of

Railway and Airline Clerks (“BRAC”). Both labor orgam

zations opposed the motion, primarily on the ground that

the collective bargaining agreements could not be modified

or terminated unless the procedures mandated by Section fh

of the Railway Labor Act were followed by REA. After

hearing, Bankruptey Judge John J. Galgay demied REA‘s

motion, noting that rejection of the agreements would de

stroy the economic balance of power each party enjoyed

when the agreements were entered into and would lead to

a situation whereby employees filing claims for their prov-

able damage could not be adequately compensated for such

items as welfare and seniority rights. The Bankruptes

Judge concluded, after weighing the equities, that Congress

did not intend this kind of rejection, nor would it be within

the overall scheme of Chapter XI.

REA <hen appealed the order of the Bankruptey Judge

te the Distriet Court, which reversed, The District Court

concluded that collective bargaining agreements could be

rejected under Section 313(1) of the Bankruptey Act and

that the provisions of the Railway Labor Act, particularly

Section 2, Seventh, were not a bar to rejection because thes

applied only during the life of the agreement and not if the

agreement had come to an end, either by expiration of the

agreed term or by rejection of the agreement in bank.

ruptey. [AM and BRAC sought a stay of the order pendi.-z

appeal, which was denied May 27, 1975. Both TAM and

BRAC appealed the order of the District Court to the

Court of Appeals.

On August 27, 1975, the Court of Appeals issued its dee

sion affirming the order of the Distriet Court, eoncluding

Be iti BAT

8

that the provisions of the Railway Labor Act for modifying

or terminating collective bargaining agreements did not

apply because the debtor-in-possession was a new juridical

entity, which was not a party to and was not bound by the

terms of the collective bargaining agreements entered into

by REA prior to its Chapter XI petition. The opinion of

the Court of Appeals relied upon its decision of a month

prior in Shopmen’s Local Union No, 455, ct al., and NLRB

v. Kevin Steel Products, Inc., 519 F.2d 698 (2d Cir. 1975),

which held that a collective bargaining agreement governed

by the Labor Management Relations Act (29 U.S.C. $141,

et seq.) could be rejected pursuant to Section 313(1) of the

Bankruptey Act.

The judgment of the Court of Appeals remanded the

ease to the District Court for further consideration and

findings on the question of whether REA’s collective bar-

gaining agreements with TAM and BRAC are sufficiently

onerous and burdensome to warrant rejection. BRAC has

heretofore filed a petition for a writ of certiorari with this

Court (Docket No. 75-553).

anc alnes? 22 Baan ADO Sd ae z - Sh DIA RL ten RA te APD ne

REASONS FOR GRANTING THE WRIT

1.

The decision below conflicts with the national labor

policy of stabilizing labor relations through the main-

tenance of colleciive bargaining agreements in indus-

tries subject to the Railway Labor Act.

The decision below, which permits the debtor-in-posses-

sion to reject a collective bargaining agreement, subject to

its being found onerous and burdensome, in disregard of

the governing provisions of the Railway Labor Act is a

clear effront to the longstanding national labor policy favor-

ing the maintenance of such agreements in order to avoid

interruptions in interstate commence,

The foundation of that policy is set forth in Section 2,

First, of the Railway Labor Act, which imposes a positive,

legally enforceable duty upon carriers and labor organiza-

tions to exert reasonable effort to make and maintain agree-

ments covering rates of pay, rules, and working conditions

of employees. Chicago & N. W. Ry. Co. v. United Trans-

portation Union, 402 U.S. 570 (1971).

Insofar as that duty rests upon carriers, it also encom-

passes debtors-in-possession, since Section 1, First, of the

Railway Labor Act specifically defines “carrier” as “any

receiver, trustee, or other individual or body, judicial or

otherwise, when in the possession of the business of any

such ‘carrier’ ” (emphasis supplied). It is thus evident

that the operations of a debtor-in-possession are in no way

excepted from the congressional purpose of stabilizing

25 A.

tie ONLI DEES

10

labor relations in industries subject to the broad coverage

of the Railway Labor Act. In furtherance of this avowed

congressional purpose, Section 2, Seventh, of the Railway

Labor Act forbids a carrier from changing the rates of pay,

rules, or working conditions of its employees as embodied

in agreements unless it has followed the procedures set

forth in Section 6. During the time that the procedures are

utilized, the parties must maintain the status quo, a require-

ment which this Court noted was central to the Railway

Labor Act’s design, and imposed in order to “prevent the

union from striking and management from doing anything

that would justify a strike.” Detroit and Toledo Shore Line

Railroad Company v. United Transportation Union, 396

U.S. 142, 148 (1969).

The decision below abruptly and markedly impairs the

prior relationship of the parties in such a way as to seri-

ously undermine the prospects of labor stability with re-

gard to the carrier’s continued operations. The permitted

rejection of the collective bargaining agreement would, as

the Bankruptcy Court pointed out, destroy the economic

balance of power each party enjoyed when the agreement

was entered into, leaving the employees in a disadvantaged

position where the debtor-in-possession could “dictate the

terms of any new agreement.” (Appendix “C”, page 27a.)

Furthermore, the permitted rejection of the agreement

would leave the parties without the machinery mandated

by Section 3 of the Railway Labor Act for the resolution of

employee grievances, which this Court has recognized as

being a “potent cause of friction leading to strikes.” Slocum

v. Delaware, L€W R. Co., 339 U.S. 239, 242 (1950).

The impact of the decision below has already produced

unstabilizing effects upon the relationship between the

— a

£55 ORAS DANES Be ee ee —

11

debtor-in-possession and its employees in the form of wild-

eat strikes. If the above-described consequences, which the

entire scheme of the Railway Labor Act attempts to avoid,

are to be tolerated in order to effectuate a particular debtor-

in-possession’s plan of arrangement, then such a determina-

tion should be made by Congress after review by this Court.

a

The decision below conflicts with the national labor

policy of distinguishing collective bargaining agree-

ments from other types of contracts.

The decision below fails to recognize the distinctions

between collective bargaining agreements and ordinary

executory contracts. When Section 313(1) of the Bank-

ruptey Act was enacted in 1938, there did not exist the body

of law developed by this Court which clearly distinguished

these types of contracts. In Textile Workers Union of

America v. Lincoln Mills of Alabama, 353 U.S. 448 (1957),

the Court recognized that rights and obligations under col-

lective bargaining agreements were to be determined by

federal law which the courts were to fashion from the

policy of our national labor laws. In United Steelworkers

of America v. Warrior and Gulf Navigation Co., 363 U.S.

574 (1960), the Court noted that the collective bargaining

agreement did not embody the ordinary contractual rela-

tionship, but rather was an effort to erect a system of in-

dustrial self-government.

The Bankruptey Court recognized that many of the rights

of the carrier’s employees arising out of the collective bar-

gaining agreement, such as pension, welfare, and seniority

rights, would be rendered incapable of forming the basis

12

of a provable claim for monetary damages, should the court

permit the agreement to be rejected. Hence, the Bank-

ruptey Court concluded that the rejection of collective bar-

gaining agreements was not intended by Congress and was

not within the overall scheme of Chapter XI. The decision

below, in treating the collective bargaining agreement as an

ordinary executory contract, disregards both this Court’s

prior decisions interpreting the nature of the collective bar-

gaining agreement and conflicts with the policy of Chapter

XI which contemplates that claims arising from the rejee-

tion of an executory contract will be redressed, e.g., See-

tion 355a(2) of the Bankruptey Act (11 U.S.C. §$755a(2)).

3.

The decision below conflicts with the clear congres-

sional intent of the Railway Labor Act to require

debtors-in-possession to follow its procedures in modify-

ing or terminating collective bargaining agreements.

The decision below attempts to make a judicial accom-

modation between the policy of the Railway Labor Act to

encourage the making and maintenance of collective bar-

gaining agreements and the policy of the Bankruptey Act

to preserve the funds of the debtor for distribution to

creditors and give the debtor a new start. However, the

Railway Labor Act explicitly demonstrates the congres-

sional intent that its procedures for the termination or

modification of collective bargaining agreements apply

where a carrier becomes subject to the provisions of the

ankruptey Act. Section 1, First, of the Railway Labor

Act clearly imposes all of the duties and requirements of

that Act upon debtors-in-possession. The decision below

squarely conflicts with that mandate.

13

Furthermore, the provisions of Section 77(n) of the

Bankruptey Act (11 U.S.C. §205()), which forbid a judge

or trustee from changing the wages or working conditions

of railroad employees except in the manner prescribed by

the Railway Labor Act where the railroad is in reorganiza-

tion under Section 77, evidences a policy decision by Con-

gress that the duties of carriers With respect to the making

and maintaining of collective bargaining agreements out-

weigh the interests of creditors of a carrier in bankruptcy.

The decision below premised its attempted reconciliation

of the two Acts on the theory that the debtor-in-possession

was a new juridical entity under the Bankruptey Act and

‘as hence a “new employer” not bound by the debtor’s

obligations under the collective bargaining agreement, yet

obligated to bargain with the LAM and BRAC as the repre-

sentatives of its employees for new agreements without

the necessity of maintaining the status quo. Hlowever, there

is no simple comparison between a successor employer of a

business transferred through purchase as described in

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

U.S. 272 (1972), and a debtor-in-possession in a Chapter

XI proceeding operated by the same management as the

debtor. To the extent that the decision below seeks to en-

graft the successorship principles enunciated in Burns to

the present matter, it conflicts with the underlying ra-

tionale of that case.

Additionally, the decision below allows the debtor-in-

possession to avoid the duty under Section 2, First, of the

Railway Labor Act to “maintain” agreements while re-

quiring it to endeavor to “make” agreements in accordance

with its obligation under the very same section. If such a

eS Bes

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Aor Ss

ae ee

Pry gat es

Beanie

14

bifurcation of the very heart of the Railway Labor Act

is to be countenanced, then Congress alone should make

that determination after review by this Court.

CONCLUSION

For all the foregoing reasons, the petition for a writ

of certiorari should be granted.

Respectfully submitted,

STEPHEN C. VLapECK

Viapeck, Exvias, Viapeck &

Lewis, P.C.

Attorneys for Petitioner

1501 Broadway

New York, New York 10036

(212) 221-2550

and

Prato E. Papps

1300 Connecticut Avenue, N. W.

Washington, D. C. 20036

General Counsel, International

Association of Machinists and

Aerospace Workers, AFL-CIO

(202) 785-2525

StepHen C. ViapEcK

SHELDON ENGELHARD

Rosert L. Javvtis

Of Counsel

November, 1975

APPENDICES

DS DeLee ee ee PMA GE IN « i Pa on ki foe My Ne eB SNS at Re te he km a

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APPENDIX ”A”

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Nos. 1220, 1221—September Term, 1974.

(Argued June 27, 1975 Decided August 27, 1975.)

Docket Nos. 75-5007, 75-5008

BrotHERHOooD OF RatLway, AIRLINE AND STEAMSHIP CLERKS,

Freight Hanpuers, Express anp Station Empuoyss,

AFL-CIO,

Appellant,

against

REA Express, Inc., Debtor,

REA Express, Inc., Debtor-in-Possession,

Appellee.

INTERNATIONAL ASSOCIATION OF MACHINISTS

AND Aerospace Workers, AFL-CIO,

Appellant,

against

REA Express, Inc., Debtor,

REA Express, Inc., Debtor-in-Possession,

Appellee.

Before:

Cuark, Associate Justice,*

MansFietp and Muuucan, Circuit Judges.

Appeal by the Brotherhood of Railway, Airline and

Steamship Clerks and the International Association of

Machinists and Aerospace Workers from a decision of the

United States District Court for the Southern District of

* Supreme Court of the United States, retired, sitting by desig-

nation.

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New York, Inzer B. Wyatt, Judge, permitting REA, as

debtor-in-possession of REA Express, Ine., to disaffirm

executory collective bargaining agreements with the two

unions under §313(1) of the Bankruptey Act, 11 U.S.C.

§ 713(1).

Remanded.

Suetpon Enceinanp, Esq., New York, N.Y.

(Robert L. Jauvtis, Esq., Vladeck, Elias,

Viadeck & Lewis, P.C., New York, N.Y,,

of Counsel), for Appellant International

Association of Machinists and Aerospace

Workers, AFL-CIO,

Davi J. Fiemino, Esy., New York, N.Y.

(Reilly, Fleming & Reilly, New York, N.Y.,

James L. Highsaw, Esq., Highsaw &

Mahoney, Washington, D.C., William J,

Donlon, Esq., Rosemont, Illinois, of coun-

sel), for Appellant Brotherhood of Rail-

way and Airline Clerks.

Artur 8, Onick, Esq., New York, N.Y. (John

C, Russell, Esq., Jane S. Solomon, Esq.,

Anderson Russell Kill & Olick, P.C., New

York, N.Y., of counsel), for Appellee REA

Express, Inc.

Mawnsrietp, Circuit Judge:

Once again we are called upon, within a matter of weeks,

to determine whether a trustee or debtor-in-possession in

bankruptey under the Bankruptey Act may, under § 313(1)

of that Act, 11 U.S.C. § 713(1), disaffirm executory collee-

tive bargaining agreements entered into by the debtor.

In Shopmen’s Local Union No. 455, et al., and NLRB vy.

Kevin Stecl Products, Inc., F.2d ——, Dkt., Nos. 74-

1872, 74-2154 (2d Cir., July 24, 1975), we held that § 313(1)

permits the bankruptey court to authorize a trustee or

Nata PT TE te ee ety x Spray

3a

debtor-in-possession to reject a collective bargaining

agreement governed by the National Labor Relations Act

upon a showing that it is onerous and burdensome and that

the equities tip decidedly in favor of termination. In

the present case we similarly hold that exeeutory col-

lective bargaining agreements subject to the provisions

of the Railway Labor Act, 45 U.S.C. § 101 ef seq., may

be rejected but remand the case for further determina-

tion as to whether the agreements in issue are sufficiently

onerous and burdensome to warrant grant of such author-

ity pursuant to §313(1).

REA Express, Ine, [*REA’”’ herein], a corporation en-

gaged in the surface and air transport of express ship-

ments, is a party to separate collective bargaining agree-

ments with two unions (the ‘unions’? herein), the Brother-

hood of Railway, Airline and Steamship Clerks (* BRAC”

herein) and the International Association of Machinists

and Aerospace Workers (‘1A M*’ herein), These agree-

ments govern the wages and working conditions of approx-

imately 6,600 persons of some 7,600 currently employed by

REA. The agreements expire on December 31, 1979, and

June 1, 1976, respectively. In addition to matters usually

covered in a collective bargaining agreement, the agree-

ments substantially affect REA’s right to close or consoli-

date facilities and transfer or lay off workers. In partic-

ular, both agreements require payment of supplementary

unemployment benefits to workers who are laid off and the

BRAC agreement provides that workers who elect to follow

their work in a consolidation are entitled to free trans-

portation and other allowances for the dislocation. Under

the BRAC agreement, transfers and consolidations can be

effected by REA only upon notice to the union and with

substantial delays. BRAC, furthermore, may demand arbi-

tration of a dispute over the effects of a consolidation.

On February 18, 1975, REA and several affiliated com-

panies filed petitions under Chapter XI, § 322 of the Bank-

SO SR Oy ee he ee

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lps oh egies

Bs Sta

Sie RAST SASSO

4a

ruptey Act, 11 U.S.C. § 205 ef seq., and by court order REA

was continued as debtor-in-possession of its property. On

March 24 REA moved pursuant to §313(1) of the Bank-

ruptey Act, 11 U.S.C. § 713(1),' and Rule 11-53 of the Rules

of Bankruptey Procedure, for an order permitting rejec-

tion of the BRAC and IAM agreements as onerous and

burdensome. In support of this motion, REA presented

evidence, accepted by the Bankruptey Judge, that it had

incurred substantial liabilities as debtor-in-possession, had

an outstanding payroll liability of over four million dol-

lars, and was unable to meet its expenses on a current basis

REA claimed that it could not continue to operate without

significantly reducing costs, and had developed a plan for

drastic curtailment and consolidation of its operations.

In sum, the collective bargaining agreements are claimed to

be onerous and burdensome because (1) their supplemental

unemployment and consolidation provisions would com-

pletely forestall the debtor, which is insolvent, from adopt-

ing and implementing a reorganization plan that would

enable it to survive, and (2) the debtor cannot meet the

full wage scales provided for in the agreements.

While fully accepting the evidence of REA’s economic

plight, Bankruptey Judge Galgay nonetheless denied au-

thority to disaffirm the two contracts, holding that ‘‘this

is not the kind of rejection or disaffirmance intended by

Congress nor would it be within the overall scheme of

Chapter XI.’? REA immediately appealed this decision to

the Southern District of New York, see 11 U.S.C. § 67(e),

1Section 313(1) of the Bankruptey Act, 11 U.S.C. §713(1),

provides :

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

the jurisdiction, powers, and duties conferred and imposed

upon it by this chapter—

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

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

parties in interest as the court may designate.’’

Aetna

5a

where Judge Wyatt reversed. Judge Wyatt found on his

review of the record that the agreements were onerous

and burdensome ‘tin any ordinary sense’? and concluded

that there was no limitation on the type of executory con-

tract which a trustee or debtor-in-possession was permitted

by §313(1) to reject.

Discussion

In Kevin Steel we faced the question of whether a

debtor-in-possession under Chapter XI of the Bankruptey

Act, which is subject to the National Labor Relations Act,

may be authorized by the district court to reject an ex-

ecutory collective bargaining agreement, We concluded

that such authority is to be found in the broad language

and purpose of §313(1) which provides, without qualifica-

tion, that the court may ‘‘permit the rejection of executory

contracts of the debtor’’. Although §8(d) of the National

Labor Relations Act, 29 U.S.C. § 158(d), to which Nevin

Steel Products, Inc, was subject, prohibits any party to a

collective bargaining agreement from terminating or mod-

ifying it unilaterally prior to exhausting certain negotiat-

ing procedures, we reasoned that, unless and until the

agreement is assumed by the debtor-in-possession, the lat-

ter, being a different entity from the pre-bankrupt com-

pany, is not a ‘“party’’? to the agreement and hence not

subject to § 8(d)’s termination restrictions with respect

to it.

Thus the tension between the Bankruptey Act’s policy

in favor of giving the debtor a new start and the Labor

Act’s policy of encouraging enforcement of collective bar-

gaining agreements was resolved by holding that, absent a

clear Congressional mandate to the contrary, such as that

specified in ¢$77(n) of the Bankruptey Act, 11 U.8.C.

¢ 205(n), with respect to ‘‘pailroad employees’’, the en-

forcement of a collective bargaining agreement must yield

to the bankruptey court’s power to relieve the debtor's

Hapa GE abhe SVP

6a

successor in bankruptey immediately of onerous and bur-

densome executory contracts. At the same time we de-

cided that a bankruptey court must scrutinize with partie-

ular care applications for rejection of collective bargaining

agreements, carefully balancing the equities on both sides

in light of the Labor Act’s poliev. The case was accord-

ingly remanded to the district court for a more thorough

discretionary reconsideration of the advisability of au-

thorizing rejection of Kevin Steel's collective bargaining

agreement,

The central question before us in this ease is whether a

collective bargaining agreement subject to the Railway

Labor Act (**RLA’’), 45 U.S.C. $$ 151 ef seq., is governed

by the same principles. The unions maintain that the

RLA’s plain language prohibits any such rejection of a

collective bargaining agreement made by the debtor-car-

rier except in the manner prescribed by that Act. We

disagree. The face of the RLA, it is true, appears at first

glance to lend some support to the union's position. A

‘‘earrier’’ is defined by $1 of the RLA to include ‘‘any re-

ceiver, trustee, or other individual or body, judicial or

otherwise, when in the possession of the business of any

such ‘earrier’....’? 45 U.S.C. $1512 Section 2 of the RLA

then provides that:

‘“No carrier, its officers, or agents shall change the

rates of pay, rules, or working conditions of its em-

ployees, as a class, as embodied in agreements except

in the manner prescribed in such agreements or in

section 156 of this title.’ 45 U.S.C. $152, Seventh.

In addition, $6 of the RLA, 45 U.S.C. § 156, (referred to

above in $2 as ‘*tsection 156 of this title’’) obligates a car-

*The National Labor Relations Act likewise applies to ‘‘legal

representatives, trustees in bankruptcy, or receivers’’, 29 U.S.C.

§$ 152, see Durand v. NLRB, 296 F.Supp. 1049, 1055 (W.D. Ark.

1969).

EARS TSS EE Nob oe. 2 ei EL SALLIE LD NL LEO

(a

rier to utilize a protracted procedure for resolution of

differences with respect to any proposed changes in a col-

lective bargaining agreement, pending completion of which

the carrier must maintain the status quo, even if the agree-

ment has expired. See Manning v. American Airlines, Ine.,

991 F.Supp. 301 (S.D.N.Y, 1963), aff'd. 329 F.2d 32 (2d

Cir.), cert. denied, 379 U.S, S17 (1964). Section 6 requires

that at least thirty days’ written notice be given of any

intended changes in rates of pay, rules or working condi-

tions and it requires conferences to be held with respect

to the changes. The RLA further provides for submission

of disputes to the National Mediation Board, see 45 U.S.C.

$155, if requested by either party or if the Board proffers

‘ts services. Section 6 also specifies that, pending the ex-

haustion of these procedures, ‘‘rates of pay, rules, or work-

ing conditions shall not be altered by the carrier... "7

The purpose of these provisions of the RLA, like that of

g8(d) of the National Labor Relations Act, 29 U.S.C.

$ 158(d), which was before us in Kevin Steel, is to avoid

disruptions of commerce by forcing the parties to exhaust

collective bargaining procedures and, where the RLA ap-

plies, to encourage use of arbitration and mediation before

engaging in self-help, strikes or other forms of unilateral

action. The unions contend that a trustee or debtor-in-

possession, being a ** ‘carrier’, is obligated to use the fore-

going statutory notice, conference and mediation proce-

dures before it may make any change in its collective bar-

eaining agreements.

In response to this argument, REA points to the broad

language of §313(1) of the Bankruptey Act, which with-

out qualification authorizes the Bankruptcy Court to ‘*per-

mit the rejection of executory contracts of the debtor,”’

11 U.S.C. §713(1). This section enables the court to im-

plement the policy of Chapter XT, which is to permit the

debtor-in-possession to deal with the debtor’s property ina

way that will enable it to survive, by relieving it of exec-

| wi a —

8a

utory contracts that would threaten or prevent its sur-

vival. As Judge Wyatt observed, the Bankruptey Act

places no restriction on the type of executory contract

which may be rejected under this section. See 8 Collier

on Bankruptcy 199 (14th ed.). Furthermore, as we noted

in Kevin Steel, Congress, by enacting § 77(n) of the Bank-

ruptey Act, 11 U.S.C. § 205(n), which excepts ‘‘railroad

employees’’ from the operation of § 313(1), demonstrated

that it ‘‘knew how to remove labor agreements from the

scope of a general power to reject executory contracts,’’

Slip. Op. 5113.5 Both courts having held below, and the

unions having conceded, that the collective bargaining

agreements are ‘‘executory’’ as to their unexpired terms,

REA argues that the Bankruptcy <Act’s plain language

must prevail.

Faced with this apparent conflict in the language and

purposes of the RLA and the Bankruptey Act we must

give effect to both statutes to the extent that they are not

mutually repugnant. In the present case we are persuaded,

as we were in Kevin Steel, that this can be accomplished

by holding that where, after careful weighing of all of the

factors and equities involved, including the interests sought

to be protected by the RLA, a district court concludes that

an onerous and burdensome executory collective bargain-

ing agreement will thwart efforts to save a failing carrier

in bankruptcy from collapse, the court may under § 313(1)

authorize rejection or disaffirmance of the agreement. To

hold that the RLA precludes rejection under such circum-

stances would ultimately be to defeat the purpose of the

RLA itself, which is to avoid disruption of commerce by

insuring that the carrier will continue operations pending

8Section 77(n) of the Bankruptey Act, 11 U.S.C. § 205(n),

provides :

“No judge or trustee acting under this [Act] shall change the

wages or working conditions of railroad employees except in

the manner prescribed in [the Railway Labor Act] ...”’

bys a MOR A Abe ae es — eee paaiee. er etek tae By LSS

9a

resolution of labor disputes, since the end result could

well be to preclude financial reorganization of the carrier

and thus lead to its demise. There then would simply be no

operations left to disrupt. If REA’s collective bargaining

agreements with the unions, for instance, are too onerous

and burdensome to permit it to survive, no purpose would

be served by obligating it to resort to RLA negotiating

procedures, which assume that the carrier involved is

viable and will be able to meet its payroll and contractual

obligations to employees and other ereditors.*

When a carrier goes into bankruptcy and does not have

the funds to continre operations indefinitely at existing

levels and labor cests pending exhaustion of the protracted

statutory RLA procedures for modification of its collee-

tive bargaining agreements, §313(1) must govern. The

practical effect of § 313(1) is to force all creditors doing

business under executory contracts with the debtor in eco-

nomic distress to renegotiate their mutual rights, relin-

quishing some in order to maintain the enterprise as a

going concern so that they can at least realize a substantial

percentage of what they would otherwise receive. It is a

rare case when the financial distress of an enterprise in

bankruptey does not work a hardship on its creditors, in-

cluding those who render services to the debtor. No reason

is shown why the unions and the employees represented

by them should under such circumstances be permitted to

insist upon strict compliance with their executory agree-

ments with REA.

When REA, after going into Chapter XI proceedings,

was authorized to operate as the debtor-in-possession, it

4 Although Congress in §77(n) of the Bankruptey Act pre-

eluded federal courts from changing the terms and conditions of

employment of railroad workers, it made this exception because

railroads, being entitled to the unique benefits of railroad reorgani-

zation under §77 of the Bankruptey Act, did not come under

Chapter X of that Act. See H.R. Rep. No. 1897, 72d Cong., 2d

Sess. (1933) ; Sen. Rep. No. 92-1158, 92d Cong., 2d Sess. (1972).

ihe a

5rd

tates Mere Bore

10a

acted as a new juridical entity. It was not a party to and

was not bound by the terms of the collective bargaining

agreement entered into by REA as debtor, see Shopmen’s

Local Union No, 455, et al., and NLRB vy. Kevin Steel

Products, Inc., supra, slip. op. at 5112; In re Capital Ser-

vice, Ine., 136 F.Supp. 420, 484 (S.D.Cal. 1955), unless and

until the contract should be assumed, either expressly or

conforming to its terms without disaffirmance, see Jn re

Public Ledger, Inc., 161 F.2d 762, 767 (8d Cir. 1947).

Although a debtor-in-possession such as REA is not bound

to assume the collective bargaining agreements of its pre-

decessor, it as a new employer is obligated to bargain col-

lectively with the representative of the employees hired by

it. The Supreme Court so held with respect to a new em-

ployer in a case governed by the NLRA, NLRB vy. Burns

Security Services, 406 U.S. 272, 277-81 (1972), and the

result under the RLA is the same. Moreover, a trustee or

debtor-in-possession, being a ‘‘earrier,’’ is expressly obli-

gated by $2 of the RLA to ‘‘exert every reasonable effort

to make and maintain agreements concerning rates of pay,

rules, and working conditions. ..°’ 45 U.S.C. $152. This

language has been interpreted to impose a positive duty on

the carrier to bargain with the employees’ certified repre-

sentative. Chicago & N.W. Ry. Co. v. United Transporta-

tion Union, 402 U.S. 570, 574-76 (1971) ; Virginia Ry. Co. v.

System Federation No. 40, 300 U.S. 515 (1937).

The question erucial to the present case is whether, in

addition to being required to bargain with the unions as

representatives of the employees, the debtor-in-possession,

as a new employer, is also obligated to maintain the status

quo, i.e., adhere to the terms and conditions of employ-

ment presently in effect pending negotiations with the

5 We construe Burke v. Murphy, 109 F.2d 572 (2d Cir.), cert.

denied, 310 U.S. 635 (1940), relied upon by appellants, as also

dealing with a situation in which the receiver had implicitly adopt-

ed the debtor’s labor agreements.

el Ne a NR CU Bred petemalrhn et ated re an Ale ae ae) DRL oe

lla

unions for collective bargaining agreements. In NLRB

v. Burns Security Services, supra, the Supreme Court

considered the applicability of such a requirement to a

successor-employer subject to the NLRA which was obli-

gated to bargain with a union. In that ease Burns had

replaced another employer in providing security services

at a certain plant. Burns hired for itself 27 of the plant

guards employed by the predecessor, and brought in 15

of its own employees. The Court held that, although Burns

had a duty to bargain with the representative of the em-

ployees of the predecessor, it had no obligation to refrain

from changing the terms of employment before such bar-

gaining oceurred. As a new employer, Burns was held

to have a right unilaterally to set the initial terms on

which it would hire employees. Moreover, the Court

stated, to bind a successor-employer to the terms of its

predecessor’s collective bargaining contract could, where

the terms of the agreement were onerous, discourage or

inhibit a potential successor from taking over a failing

business. Thus a new employer, it was emphasized, must

be granted certain prerogatives at the outset in making

changes in the method of operation, business structure

and labor arrangements of a venture. Otherwise, the free

flow of capital and efforts to revive or expand a weak

enterprise might be frustrated.

These principles are particularly applicable to the ef-

forts of a trustee or debtor-in-possession to save a carrier

from complete collapse and liquidation. Unless the debtor-

in-possession is permitted to act promptly, albeit unilater-

ally, in avoiding onerous employment terms that will pre-

vent it from continuing as a going concern, the enterprise,

and with it the employment of its workers, may fail. Al-

though a solvent employer might be able to survive con-

tinuation of the status quo pending the protracted nezo-

tiations, including arbitration and mediation as provided

for by $6 of the RLA, a trustee or debtor-in-possession

t

12a

in charge of a carrier teetering on the ea of disaster

would, if saddled by onerous executory terms of its prede-

cessor’s agreements, not be able to continue in business

that long.® Indeed, REA, as debtor-in-possession, main-

tains that unless it carries out immediately the plan

(Plan B-2) which it has initiated for drastie reductions

in its service-center facilities and regional accounting

offices, requiring substantial reductions in rates of pay

and operational economies, it will not be able to continue

in operation at all.

For these reasons we are persuaded that REA, as the

debtor-in-possession in bankruptey, is a new employer

which, while obligated as a carrier to negotiate with its

employees’ collective bargaining represntative, is not

bound to follow the elaborate and protracted procedures

of $6 of the RLA before putting into effect its proposed

terms of employment. Where its employees are repre-

sented, as here, by collective bargaining representatives,

6 As one commentator observed:

‘Tt is doubtful that the Penn Central reorganization will con-

tinue long enough to enable its trustees to resolve the train

crew dispute with the unions. It is even more doubtful that

a Chapter X or XT proceeding for an airline can remain

viable for the period required to exhaust the procedures of

the RLA. Hence, the operation of that Act seems effectively

to preclude the resolution of most labor relations disputes in

a bankruptey rehabilitation proceeding for a railroad or an

airline. Moreover, the RLA seems also to preclude any in-

terim relief from the onerous collective bargaining contract

of a railroad or an airline in bankruptcy proceedings. Where

the trustee, receiver or debtor in possession does not exercise

the option to assume or reject such a contract, the Act fore-

stalls the negotiation of a new and less onerous contract to

apply while the proceedings are pending.’’ Countryman,

Erecutory Contracts in Bankruptcy, Part IT, 58 Minn. L.

Rev. 479, 498 (1974).

Section 77(n) of the Bankruptey Act applies, of course, to the

Penn Central, requiring it to follow the procedures prescribed by

§ 6 of the Railway Labor Act.

7 eae

13a

it is obligated merely to give reasonable notice of its pro-

posed terms and to negotiate in good faith for a reason-

able length of time before putting them into effect. In

arriving at this conclusion we are not unmindful of the

Supreme Court’s dictum in Burns to the effect that there

will be instances where, when a new employer retains all

employees in a unit, it will be appropriate for the em-

ployer to consult with the employees’ bargaining repre-

sentative before fixing new terms, 406 U.S. at 294-95.

However, we do not interpret this exception as mandating

that a new employer, pending negotiation of a new agree-

ment with the union (which the debtor-in-possession here

is obligated to undertake by $2 of the RLA, 45 U.S.C.

$152) must adhere unqualifiedly to the terms of its prede-

cessor’s agreements, We read this suggested exception

as being limited to those situations where employees are

led at the outset by the suceessor-employer to believe that

they will have continuity of employment on pre-existing

terms and as not applying where the new employer dis-

pels any such impression prior to or simultaneously with

its offer to employ the predecessor’s work force, Spruce

Up Corp., 209 NLRB No. 19, 85 LRRM 1426 (1974), see

Note, The Bargaining Obligations of Successor Employers,

88 Harv. L. Rev. 759, 777-78 (1975).

In the present case REA as debtor-in-possession has

not misled employees into the belief that it would adhere

to pre-existing terms, conditions and scope of employ-

ment pending negotiations with the unions. On the con-

trary, the Chapter XI proceeding, which was widely pub-

licized, put the unions and REA employees on notice that

changes would be required to avert collapse of REA. The

debtor-in-possession, furthermore, then initiated changes

by putting into effect a series of retrenchments and econo-

mies designed to enable operations to be continued on a

lesser seale, including the partial implementation of Plan

B-2, deferred payment of 10% of its union payroll, and

reduction in holiday pay.

l4a

Appellants further contend that, even if the district

court had authority under §313(1) of the Bankruptey Act

to authorize REA to reject the debtor’s collective bargain-

ing agreements with the unions, the district judge abused

his discretion in granting such authority in this ease,

since he failed to balance the equities, including the em-

ployees’ inability in Chapter XI proceedings to evaluate

and obtain compensation for loss of their pension, welfare,

seniority and other eontract rights. See Matter of Over-

seas National Airways, Inc., 238 F.Supp. 359, 361-62

(BE.D.N.Y. 1965). REA has countered by furnishing esti-

mates of the dollar amounts that it would be obligated

to pay under its agreement with BRAC if that agreement

were continued in effect and estimates of the amounts

whieh it proposes to save through consolidation and _re-

trenchment under Plan B-2. However, in view of the

serious effeets which rejection has on the earrier’s em-

ployees it should be authorized only where it clearly ap-

pears 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. Here the reeord

fails to indicate clearly the extent to which each agree-

ment preeludes continued operation of REA, the extent

to which the district court weighed the conflicting equities,

or any findings by the court other than its statement that

‘‘in any ordinary sense of the words the two contracts

are ‘onerous and burdensome’ *’. We note, for instance,

that while certain elauses of REA’s contract with BRAC

would impose heavy burdens on REA, at least some of

these clauses do not appear in its eontract with TAM.

Accordingly, substantially for the reasons stated in re-

manding Nerin Steel, we remand the ease to the district

court for further consideration and findings on the ques-

tion of whether REA’s agreements with BRAC and IAM

are sufficiently onerous and burdensome to warrant an

authorization to the debtor-in-possession to reject them.

SANS SIE AN DAE 6 iki IEE Mt Enea hy WO IS A a ani en aire Dik ED

APPENDIX "B”

[Filed May 19, 1975 8.D. of N.Y.]

OPINION

In Re:

REA Express, Ixec., Debtor,

REA Express, Ixc., Debtor and

Debtor-In-Possession,

Appellant,

-against-

Brorukruoop or Ramway, AIRLINE AND

STeamsiire CLerKs, fPReigut HANDLERs,

Express aNnp Station Empwtoyers, AFL-CIO

and

INTERNATIONAL ASSOCIATION OF MACHINISTS,

Appellees,

75 B 2538

This is an appeal from an order of Bankruptey Judge

Galgay made on April 29, 1975. The order denied a mo-

tion by REA Express, Inc., debtor in possession in a pro-

eeeding under Chapter XI of the Bankruptey Act, for an

order permitting the rejection of two executory contracts

between the debtor and two labor unions (referred to in

short as BRAC and IAM). Authority for such an order

is found in Section 313(1) of the Act (11 U.S.C. §713(1)).

Authority for the appeal is found in 11 U.S.C. $67 (ce)

and Rules 801 and following of the Bankruptey Rules.

The Bankruptcy Judge filed on May 2, 1975, an opinion

giving the reasons for his decision.

1.

The Bankruptcy Judge found and it is undisputed that

the two contracts are ‘‘executory’. He stated that he would

£0 eee ha rae

16a

assume that a collective bargaining contract could be re-

jected but he concluded that rejection of the two contracts

by REA ‘‘is not the kind of rejection or disaffirmance in-

tended by Congress nor would it be within the overall

scheme of Chapter XI.’’

The Bankruptcy Judge believed that rejection should be

permitted if the contracts were ‘‘onerous and burdensome’’

but he appears to have felt that such a finding could never

be made if it would permit rejection of a collective bargain-

ing contract.

The findings of fact of the Bankruptey Judge (which are

accepted) show, however, that in any ordinary sense of the

words the two contracts in suit are ‘‘onerous and burden-

some’’, This expression appears to be quoted from In re

Overseas National Airways, Inc., 238 F.Supp. 359 (E.D.N.Y.

1965). Section 313(1) does not itself provide any guidance

to the exercise of the power of rejection but it seems clearly

intended that rejection should be permitted if it would be

beneficial to the estate of the debtor. See 8 Collier on

Bankruptey (14th ed.) 206-207. The findings of the Bank-

ruptey Judge show that in the circumstances of REA these

two contracts are detrimental to its operations and thus to

its estate.

2.

There is nothing cited in legislative history to indicate

that collective bargaining agreements cannot be rejected

under Section 313(1). 8 Collier on Bankruptcy (14th ed.)

199 states: ‘‘There is no restriction on the type of ex-

ecutory contract that may be rejected.’’

Judge Levet some years ago decided that collective bar-

gaining agreements were subject to rejection under Section

313(1). In re Alaber Bros. Inc., 173 F.Supp. 83 (1959).

Later decisions to the same effect are collected in Judge

Knapp’s opinion in Shopmen’s Local Unions etc. v. Kevin

a ANA EO ED iv

Steel Products, Inc., 381 F.Supp. 336 at 338 (1974) (now

in the Court of Appeals, with oral argument said to be

scheduled for June 11, 1975). Judge Knapp’s decision,

which is contrary to that of Judge Levet, is easily dis-

tinguishable on the facts; from the broad conclusion drawn

by Judge Knapp, I must, with great deference to a learned

colleague, respectfully dissent.

3.

The Bankruptcy Judge did not reach a point made for

appellees, namely, that Section 77(n) of the Bankruptcy

Act (11 U.S.C. § 205) precludes rejection by REA of an

executory contract t1ffecting wages or working conditions

of its employees. Section 77(n) provides in part as fol-

lows:

‘‘No judge or trustee acting under this title shall

change the wages or working conditions of railroad

employees except in the manner prescribed in sec-

tions 151 to 163 of Title 45 [Railway Labor Act], as

amended June 21, 1934, or as they may be hereafter

amended.’’

This provision might give some pause were it applicable,

but it is plainly not applicable.

Section 77 of the Bankruptcy Act deals with ‘‘Reorgani-

zation of Railroads Engaged in Interstate Commerce’’, was

enacted in 1933 to meet special needs in respect of rail-

road reorganizations, and would seem to have no conceiva-

ble application to REA. By its terms that part of Section

77(n) on which appellees rely applies to ‘‘railroad em-

ployees’’. No claim is made or could be made that the

employees of REA are ‘‘railroad employees’”’.

The decision in /n re Overseas Airways, Inc., above cited,

is distinguishable on its facts. If it were applicable to the

case at bar, it would not be followed.

= 7 a maencsinsrobinemaseatcn

18a

4,

The appellees also rely on a part of the Railway Labor

Act (45 U.S.C. § 1 and following), specifically on that part

of 45 U.S.C, $152 providing that no change may be made

by a ‘‘carrier’’ in ‘working conditions of its employees

... as embodied in agreements except in the manner pre-

scribed in such agreements or in section 156 of this title

[45 U.S.C. $156)’. This provision does not preclude re-

jection of the ‘‘agreements’’ in bankruptey. It applies

only during the life of the ‘‘agreements’’. If such ‘‘agree-

ments’? have come to an end, either by expiration of their

agreed term or by rejection in bankruptey, then the pro-

vision ceases to have any application.

The order of the Bankruptey Judge is reversed and the

motion of REA for permission to reject the two executory

contracts is granted.

So ORDERED.

Dated: May 19, 1975

/s/ Inzer B. Wyatr

Inzer B. Wyatt

United States District Judge

= weg . . Ahi eb MANOA VAST RT SO etiae

19a

APPENDIX “"C”

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

In Proceedings for An Arrangement

No. 75 B 253

In the Matter

itil dais

REA Express, Inc., Debtor.

OPINION

APPEARANCES:

Awnverson Russevu Kiui & Outck, P.C.

630 Fifth Avenue

New York, New York 10020

Attorneys for Debtor

Reruiy, Fteminc & Remy, Ess.

1414 Avenue of the Americas

New York, New York 10019

Attorneys for B.R.A.C.

Vuaveck, Extas, Vuapeck & Lewis, P.C.

1501 Broadway

New York, New York 10036

Attorneys for LA.M.

Joun J. Gatcay, Bankruptcy Judge

REA Express Ine. (REA) moves pursuant to See.

313(1) of the Bankruptey Act and Rule 11-53 of the Rules

of Bankruptcy Procedure to disaffirm two collective bar-

gaining agreements as burdensome and onerous. Two

unions, Brotherhood of Railway, Airline & Steamship

Clerks, Freight Handlers, Express & Station Employees

(‘‘BRAC’’) and International Association of Machinists

rh ake GS ge eee

BS EES

20a

and Aerospace Workers (‘‘1AM’’) move to compel REA

to comply with its collective bargaining agreements and to

restore certain deferred wage payments to ‘‘BRAC’’ and

**TAM’’ members.

The material facts developed over two days of hearings

are not in serious dispute and are as follows: REA Ex-

press, Ine, (**REA’’) filed a petition under Chapter XI,

Section 322 of the Bankruptey Act on February 18, 1975

and by order of this Court on that date, REA was con-

tinned in the possession and operation of its business.

REA is a Delaware corporation with its principal place

of business in New York City. It provides surface and

air express service to customers throughout the United

States. It has some 300 terminals or service center

facilities in all fifty states and Puerto Rico and presently

employs 7,624 persons.

REA is a party to two collective bargaining agreements.

Approximately 6,805 of its employees are covered by a

collective bargaining agreement between REA and BRAC,

which agreement does not expire until December 31, 1975.

Approximately 332 of its employees are covered by a col-

lective bargaining agreement between REA and IAM

which agreement does not expire until June 1, 1976. Dur-

ing 1974 there were approximately 8,500 BRAC employees

and 400 IAM employees, Each collective bargaining agree-

ment prescribes the terms and conditions of employment

for covered employees including (a) wage rates, (b) over-

time pay, (ce) holiday pay, (d) vacation pay, (e) fringe

benefits and (f) unemployment or ‘‘layoff’’ benefits. Each

agreement affects REA’s right to close or discontinue or

consolidate facilities and to transfer or layoff workers.

As of March 28, 1975 REA had ineurred liabilities as

debtor in possession of $3,317,000. In addition, it had an

outstanding payroll liability of $4,050,000 and a liability

for ‘“‘CODs’’ collected on behalf of its customers of

$1,871,000. REA is presently collateralizing outstanding

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irrevocable letter of credit issued by First Pennsylvania

Bank, N.A. (‘‘First Penn’’) with cash at the rate of

$75,000 per week and is paying the IRS on account of pre-

filing Railroad Retirement Taxes, $25,000 per week. Some

$500,000 has already been deposited as cash collateral for

letter of credit and some $1,900,000 in letters of credit

remains to be collateralized.

Asserting that it was unable to meet its expenses on a

current basis, REA’s Management, in a collective deci-

sion, deferred payment of 10% of its union payroll for

the four consecutive weekly pay periods commencing Feb-

ruary 24th, March 3rd, 10th and 17th, 1975. This 10% de-

ferral remains a liability of REA and amounts to some

$150,000 per week. In addition, REA has been unable to

pay its union employees some $250,000 due them as holiday

pay for Washington’s Birthday. For each of the four

weeks commencing March 31, 1975, REA requires approxi-

mately $3,500,000 to meet its current obligations assuming

a continuation of the 10% deferral in union wages and the

present level of payments to the First Penn and the IRS.

Revenues are projected at some $3,500,000 per week over

this period with the result that as of April 25, 1975, the

cash balance is estimated at $547,000. These projections

de not take into account the payment of the $3,317,000 in

DIP liabilities already incurred.

Assuming the continuation of a 90% union payroll,

REA claims it cannot continue to operate without either

generating more cash or substantially reducing its costs.

It is not meeting its obligations currently and seems to

have survived to date by deferring obligations to trade

creditors, equipment lessors and its emplovees.

REA’s gross payroll amounts to some $1,700,000 per

week with wages representing some 60% of REA’s total

weekly expense. Of this gross payroll some $1,500,000

represents union wages of which 95% is paid to BRAC

members and the balance to [AM members. As previously

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noted, 10% of the union payroll has been deferred for

several weeks allegedly due to lack of cash while executive

payroll has been reduced between 16% and 20%,

REA has generated two alternate plans or programs de

signed to revise its operations and reduce its costs of op-

eration. These plans, known as A and B-2 have not been

implemented because of provisions contained in. its col-

lective bargaining agreements with BRAC and TAM,

During the period from 1969 (when current management

took over) to 1978, RIEA’s expenses almost consistently

exceeded its revenues. In 1974, REA, for the first time,

realized a small profit. However, starting in or about

November of last year, adverse economic conditions brought

about a decline in revenues, and on February 18, 1975 these

proceedings were filed. Despite reductions in its expenses

REA has been unable thus far to keep pace with declining

revenues.

REA’s plan B-2 contemplates the closing of 61 service

centers and the consolidation of 53 service centers; the

elimination of 2 regional accounting offices; and the redue-

tion of service center facilities from 301 te IS7. REA claims

the effect of the implementation of Plan B-2 will be to re-

store the balance between REA‘s operating revenues and

expenses so that in June of this year REA will show a small

operating profit and by August of ‘his year, it projects an

excess of revenues over operating expenditures on a per-

manent basis. Even with the implementation of Plan B-2,

REA claims it could not operate profitably at present reve-

nue levels and still pay 100° of existing payrolls as man-

dated by its collective bargaining agreements with BRAC

and IAM.

REA’s Plan A is an all air express plan which com-

pletely eliminates surface operations. It contemplates the

closing of 297 service centers, the use of 140 air terminals

and 828 ‘‘third-party’’ locations. REA would end up with

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144 operating facilities servicing 472 airport locations. The

vehicle fleet would be reduced from 6,447 to 784 and the

number of employees would be reduced to 1800, Plan A

contemplates profits for REA commencing with August,

175. Like Plan Be2, the implementation of Plan A> will

not result in profitable operations without a reduction in

existing payrolls. The eash flow projections for both

Plan A and Plan Be2 do not take into account any of the

one-time costs of implementation or the payment of exist-

ing debts. It is claimed, however, it will provide a basis

on which a successful operation may be predicated.

REA’s agreement with BRAC required a 150 wage in-

erease on April 80, 1973 and eight cents per hour cost of

living adjustment on February 3, 1974, a ten cents per hour

adjustment on July 1, 1974, a 10% inerease on October 1,

1974 and nine cents per hour adjustment on February 1,

1975. REA‘s agreement with TAM required similar’ in-

creases to those ¢ranted to BRAC,

In 1974 REA paid its employees approximately $101,000,-

000 in wages, $9,000,000 in vacation pay, and $3,000,000 in

holiday pay. Under the collective bargaining agreements

with BRAC and IAM, REA is required to pay supplemen-

tary unemployment. Accrued vacation benefits required

by the Union agreements total $11,000,000, In the event

BRAC members are layed-off they are entitled under their

collective bargaining agreement to $18.00 per day unem-

ployment benefits for some 781 days of which REA must

pay $5.30 per day per employee until Railroad Unem-

ployment benefits are exhausted and, thereafter, REA must

pay the full $18.00 per day. In 1974 these benefits cost

REA almost $600,000.

REA’s agreement with BRAC required comparability

increases which have not yet been implemented but if they

are will increase REA’s payroll costs.

Rule 12 of REA’s agreement with BRAC governs REA’‘s

right to effect the transfers and consolidations inherent in

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either Plan A or Plan B-2. Rule 12 may involve delays up

to at least 60 days, and it requires arbitration of any dis-

pute respecting a transfer or consolidation upon demand by

the Union. BRAC can not deny REA’s right to change

its operations, but it may compel arbitration of the ‘‘man-

ner of implementing the contemplated change’’. Em-

ployees who are laid-off are entitled to supplementary un-

employment benefits and those who elect to follow their

work are entitled to free movement of household goods,

free transportation, time-off to relocate and the like.

The implementation of Plan B-2 involves changes in

what are known as ‘‘over-the-road runs’’. Such changes

are governed by Rule 8 of the BRAC agreement which re-

quires consultations between REA and Union before such

changes may be effected.

DISCUSSION

REA asserts it is unable to effect the proposed consolida-

tion under its existing collective bargaining agreements by

reason of the delays inherent in following the procedures

thereby required and by reason of the costs to REA man-

dated such agreements. REA asserts it cannot meet its

eemtractual wage and fringe benefit obligations; it claims

‘* “amnet meet its obligations to suppliers as debtor in

peeeeesem: and it cannot incur substantial liabilities for

mem lenment and relocation benefits required by its agree-

= wth BRAC and IAM. It further claims it must

‘Fo »© ems om costs promptly and inexpensively.

i. os “ome it is unable to pay the wages presently

voter! oe ot eelleetive bargaining agreements with

ei) wet | 8M end the cost-of-living, comparability and

(ten Senet tech will, in the future, be required by those

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f otter « eaye of REA is permitted to promptly imple-

nen! ether Man A or Plan B-2 and to maintain its union

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25a

payroll at existing levels it has a reasonable chance of

obtaining needed financing, restoring profitability and ef-

fecting a plan of arrangement with its creditors. It claims

it cannot accomplish these objectives unless its collective

bargaining agreements with BRAC and IAM are disaf-

firmed.

For all of the foregoing reasons, REA asserts that the

collective bargaining agreements between it and its unions

BRAC and IAM are onerous and burdensome,

The unions urge that the collective bargaining agree-

ments between REA and them are governed by the Rail-

way Labor Act, that REA is a ‘‘Carrier’’ subject to the

provisions of that statute and that it cannot change the

‘‘rates of pay, rules or working condition of its employees”?

except in the manner prescribed in the Act or in the col-

lective bargaining agreement itself. They claim REA

acted illegally in unilaterally reducing the wages paid to

its employees who are covered by the instant collective

bargaining agreements.

They fail to directly claim that these collective bargain-

ing agreements are not onerous and burdensome but say

if they are so are the terms of a great number of con-

tracts and agreements to which REA is a party, yet REA

has not sought to have this Court disaffirm any of its other

agreements.

Finally it claims that this Court has the power and should

compel REA to honor the terms of the labor agreement.

See. 313(1) of the Bankruptcy Act permits the rejection

of executory contracts of the debtor upon notice to the par-

ties to such contracts and to such other parties as the Court

may designate.

Assuming, without deciding that this Court has the

power to reject a collective bargaining agreement, it may

exercise that power if it finds the agreement to be executory

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and ‘‘onerous and burdensome”’ to the debtor. Cf Shop-

men’s Local v. Kevin Steel Products, (2d Cir.) 74-215A.

Both labor agreements herein are executory within the

meaning of See. 315(1) since their expiration dates are

the end of 1975 and the middle of 1976.

This case turns then on the meaning of ‘‘onerous and

burdensome’’ in the context of a dispute wherein REA

claims the terms of the coliective bargaining agreements

are so oppressive, restrictive and expensive that it cannot

possibly survive in a Chapter XI proceeding unless these

agreements are scrapped, and impliedly, a more congenial

one negotiated.

Ordinarily the rejection of an executory contract is

based upon the debtor’s desire to end a commitment which

presents a financial drain on the company and thereby en-

able it to come out of a Chapter XI proceedings by the ac-

ceptance of a plan of arrangement by its creditors. It

does not mean that an agreement which, when entered into

was satisfactory, but because of changing economic cir-

cumstances, is now too expensive. The usual instance of a

contract appropriate for rejection is a lease of expensive

office facilities, say, on Park Avenue, and because of re-

duced staff and the change in the nature of the business,

such prestigious and expensive quarters are no longer

needed and its continued performance thereunder would be

a financial drain.

Another example would be the rejection of executory

contract involving the employment of dress designers

after the Chapter XI debtor changed the nature of its

operation from designing and manufacturing its own

dresses, to that of a jobber or contractor doing work for

other manufacturers who had their own designers,

Here, REA says, if it can reject and disaffirm these labor

contracts then it can embark on Plan A or Plan B-2 and

within a short time rehabilitate itself. It says the contin-

PINE eae TA ae sate See ele ee ee Ser noun Gers ttn i awe ee Oe ee eee ee We i he Cee Ser ke Meera eae Ne SOC Ure t: | un ea.) eee ty

27a

uance of the executory contracts is a financial drain as it

probably is, but it wants to retain its labor force to con-

tinue the operation of its business but at some level of

wages, working conditions and other provisions less than

those in the present agreements. To permit the rejection

of these contracts would destroy the ceonomic balance of

power each party enjoyed when the contracts were entered

into. The employees would be at a substantial disadvant-

age and be in the position where REA could dictate the

terms of any new agreement. Further See. 313(1) con-

templates upon the rejection of an exeeutory contract, the

party who suffers thereby is allowed to file a claim in the

proceeding for its provable damage. Apart from those

damages easily calculated such as past wages, vacation and

severance pay, how can a damage figure be placed on the

value of pension rights, welfare rights, seniority rights,

ete. to each of the affected employees. The Bankruptcy

Court is a Court of Equity and must balance these equities

in the exercise of its discretion.

The history of the hostility between management and

labor in REA since 1969 is the subject of an opinion in

REA EXPRESS Inc, vy. BRAC, 358 Fed Supp. 760, by

Hon. Edward Weinfeld. In it Judge Weinfeld recites the

long and difficult experiences of both parties in connection

with a threatened strike.

In that opinion, Judge Weinfeld made comments which

are illuminating and relevant in this proceeding.

‘That a carrier is in economic straights does not re-

quire its employees to carry the burden of its eco-

nomic problems.... REA is a private enterprise cor-

poration operating under a laissez-faire economy; the

circumstances that it cannot meet the demands of a

competitive system and may face bankruptcy does not

require its employees to accept a wage they deem in-

adequate and to surrender their right to strike. To

28a

hold that the employees assertion of their rights mani-

fests a failure to exert every reasonable effort to re-

solve all disputes and thereby constitutes a See. 2

First Violation is without validity. It suggests that

a court has the power to apply a coercive foree upon

the employees to yield to the earrier’s offer even

though they deem it inadequate—in effeet it would be

to impose upon them the financing of an under-eapital-

ized earrier when its own stockholders, here few in

number, refuse to make further investments and sup-

ply needed eapital.’’

In the matter of Overmeyer, Bankruptey Judge Roy

Babitt, Collier-Bankruptey Cases, Volume 1, pg 522, in

refusing to permit the rejection of a lease of real property

, stated:

‘Moreover, this debtor does not contend that the

warehouse is totally unprofitable; it merely states that

the profits generated from its operation are not suffi-

cient and that West Cash & Carry should now be told

that a contract under which it has performed its pact

4 for eight years is now to be negated, thereby foreing

West Cash & Carry to renegotiate a new contract of

lease or peremptorily remove its operation elsewhere.’’

After commenting on his power to do equity he goes on

a ‘*T conclude, in the exercise of my judgment, that this

: is not the kind of rejection purposed by Congress by

its language in See. 313(1). Nor would such rejection

be within the overall scheme of Chapter XT. Chapter

XI is not a guarantee that every plagued company

will sueeeed in Chapter XT rehabilitation, Jn re

Webcor, Inc. 392 F.2d 893 (7th Cir. 1968), cert. denied

393 U.S. 837 (1968), and it gives no basis to hold that

performing parties to agreements which years later

might have become less economically desirable than

they were at the beginning, are to be prejudiced in

their reliance on such agreements made with sophisti-

cated debtors under terms, one may assume, as advan-

Ri Sh? EB Ee 9 Sek Riv ns” La

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29a

tageous to that debtor as could be when originally

negotiated.’’

The Court has been called on to decide this issue, It

has not been called on to weigh for the debtor or the

Unions, the consequences which might flow from adjudica-

tion, including possible termination of thousands of jobs

in these recession days, unemployment for a period of

time, loss of pension payments to former employees and

other disabilities. Surely both parties are sophisticated

enough to know where their interests lie.

I conclude that REA’s application to reject and dis-

affirm the collective bargaining agreements with BRAC

and IAM should be denied. In my judgement this is not

the kind of rejection or disaffirmance intended by Con-

gress nor would it be within the overall scheme of Chapter

XI.

As has been observed, Chapter XI is not a guarantee

that every plagued company will succeed in Chapter XI

rehabilitation. In re Webcor Inc. 392 F.2d 893 (7th Cir.

1968).

Regarding the Union’s demand that the Court order

that REA honor its collective bargaining agreements and

to pay 100% of the rate of wages called for therein, I de-

cline to do so,

The Unions have remedies available to them under such

agreements, and this court may await the administrative

grievance process, see Nathanson v. NLRB 344 US 25

(195).

In view of the financial conditions of the debtor in pos-

session detailed above, I feel the parties to the agreements

can evaluate the wisests course to follow in light of all the

circumstances. REA’s application for authority pursuant

to Sec. 313(1) of the Bankruptcy Act to disaffirm its execu-

tory contracts with BRAC and IAM is denied.

. ee ep Bag I eed ginal RN MARR TONY

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The applications of BRAC and IAM seeking an order

of this Court directing REA to pay such sums as are due

and payable to employees who are members of their respee-

tive unions under the terms of existing labor agreements

between the parties is also denied at this time without

prejudice.

--

Ir Is So Orperep.

Jonn J. GALGAY

Dated: New York, New York

May 2nd, 1975

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