Petition for Writ of Certiorari — O'Neill Group v. Continental Airlines Corp., 113 S. Ct. 87 (1992) (No. 91-2014)
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soprene Court, U.S,
: ,
91-2814 FILED
JUN 12 1999
In The Supreme Court Of The United Séatgs o- ;,,; CLERK
OcrToBerR TERM, 1991
O’NeiLt Group, et al., Petitioners
V.
CONTINENTAL AIRLINES Corp., Respondent
PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
* MARTY HARPER
RANDOLPH J. HAINES
ALLEN CLARKE
JANET NAPOLITANO
LEWIS AND ROCA
40 North Central Ave.
Phoenix, Arizona 85004
(602) 262-5311
*Counsel of Record for Petitioners
QUESTIONS PRESENTED
Under Chapter 11 of the Bankruptcy Code, when an employer
who is a debtor in possession rejects its collective bargaining
agreements with its employees, the employees are entitled to con-
tract rejection damages. In this circumstance:
1. Must the employees forego their right to strike in order to
preserve their entitlement to contract rejection damages?
2. Should contract rejection damages be limited by the
hypothetical period the employer would have stayed in business if
it had not rejected its collective bargaining agreements, even if
the employer in fact stayed in business and even if rejection
damages for other types of creditors are not so limited?
-ij-
LIST OF PARTIES
Petitioners in this Court, appellants in the Fifth Circuit Court
of Appeals, are several hundred past or present pilots and flight
attendants of Continental Airlines, Inc. (“Continental”). They
are denominated as “petitioners” or “the O’Neill Group” in this
petition. Petitioners filed an Application to Extend Time to File
a Petition for Writ of Certiorari on January 8, 1991, and the Court
granted the application on January 9, 1991 (No. A-528). Annex A
to that Application lists all of the petitioners.
RULE 29.1 STATEMENT
_ This petition is not filed by or on behalf of any corporation.
-iii-
TABLE OF CONTENTS
Page
CUTE BI BF PRRNIEIES © BED wrescosensinsncmencnecesnernsenteneatinnnnomaneetininstineii i
Lata SCI ICRI vihitniichictnsitcitiomeriantnsilietnninscieancbiociettovenatatibnnnnstintines ii
EAE Siu 8 eee AUNT ciinicnnieticnnntsntiritciniedsennensinieetintinmnnanininatinten li
a I FE Oe Ne i ititctennncnssicatienniiniciviincsicimniemaintigi vi
CFEC TN a RENIN aisdictlinsichshaieibnsttinabtnivitiniinidecbeditasintatadiaiuewiietie 1
FOF TT ticitntanntinsininunnnicinnnisiiinnitcieeiitinaisinhibisilindhaninnata 1
SF PGE OF BD Bee Oe i nrachtecieleintinnetictitaheninesisdaiahetitiiinabmsesaen 2
SD RPE E OR TE CAGE in isectcctecccncinsnesicensisithinnianttncenevensons 2
A. The ALPA and UFA Labor Contracts .....0..........:cse000 3
B. Continental’s 1983 Bankruptcy, the Rejection
of the ALPA and UFA Contracts, and the
Th 5 Ee ae Eee 3
CC, Tae AA Cn UTA Bama iiss cesiccessisccnesnccennscnnsotoonsinne 4
ED IE II sais iai ener cnesietskcnntrnanctsanmnnee >
1. The bankruptcy court’s dismissal of the
pilots’ and flight attendants’ contract
rejection claims on summary judgment.................. 5
2. The O’Neill Group intervention and
IE sitiintiteaccicreennictinitniimmnibiniiitbintininenncmnarenees 6
-iv-
TABLE OF CONTENTS (cont'd)
REASONS FOR GRANTING THE WRIT ......cccccsessseseseeseneeees 8
I.
Il.
The Fifth Circuit Opinion Creates An Unnecessary
Conflict Between The Right To Strike Guaranteed
Under The Railway Labor Act And The Right To
Contract Rejection Damages Guaranteed Under
The Bakreptey C60 ccenitecressssssinitaneninstninstitinnarsnsenessevescorecens 8
A. The Fifth Circuit’s Decision Creates a New
Class of Indentured Servant — The § 502(g)
Employee-Creditor senncnenninnnsitpnuliiaablincindenicae 10
B. The Fifth Circuit’s Decision Encourages the
Massive Defeat of Employees’ Rights Under
the Bankruptcy and Labor Laws 12
C. The Fifth Circuit’s Decision, by Seriously
Misinterpreting the Applicable Law, Cuts Off
Petitioners’ Only Available Remedy for
C§ormntlenCital O GRNROGIN ci ccensiincesssittinsitanlnaieniintinnwetanassnsenes 13
The Fifth Circuit’s Decision Limiting Contract
Rejection Damages Misapplies Fundamental
Principles Of Law On Important Matters Going To
The Heart Of The Bankruptcy System.................cccecceseeeseees 14
A. Limiting Damages Based on Speculation of a
Shutdown Contravenes Basic Bankruptcy Law......... 16
1. The decision violates Bankruptcy Code
requirements for treating all creditors
GUI acecesssnmnnrvensinnnnanennsniinnenienailaliididlilasininitasnnniian 16
iceiaiasneiiaeiabiaaiaaeae maaan ie
-V-
TABLE OF CONTENTS (cont'd)
Page
2. The ruling contradicts this Court’s
decision in NLRB v. Bildisco & Bildisco ...........++-. 17
B. The Fifth Circuit’s Decision Establishes a
Measure of Contract Rejection Damages
Under § 502 That Is At Odds With Basic
Contract Law Princiqtles.........ctttecovcsesesssnssssressesesesscsvenees 19
CaN sticnsietielyieciietiabaihcniatieisnasribieeehicecacinaniantticii 22
-vi-
TABLE OF AUTHORITIES
Case
Air Line Pilots Ass’n v. O’Neill,
111 S. Ct. 1127 (1991)
In re Bildisco,
682 F.2d 72 (3d Cir. 1982), aff'd,
pe ee Se See ea
Briggs Transport Co. v. Int’l Brotherhood of Teamsters,
739 F.2d 341 (8th Cir.), cert. denied,
469 U.S. 917 (1984) Alibi
Brotherhood of Railroad Trainmen v. Jacksonville
Terminal Co.,
SO UT I cece
Center Chemical Co. v. Avril, Inc.,
392 F.2d 289 (Sth Cir, 1968) ..csssscssscsssssssssseesseesesees
In re Continental Airlines Corp.,
57 B.R. 845 (Bankr. S.D. Tex. 1985)
Film Projects, Inc’,
231 N.L.R.B. No. 146 (1977)
Florida East Coast Railway Co. v. Brotherhood of
Locomotive Engineers, 362 F.2d 482
(Sth Cir. 1966)
Globemaster, Inc. v. Magic American Chemical Corp.,
386 F.2d 420 (6th Cir. 1967)
Page
11
14
14
14
20
TABLE OF AUTHORITIES (cont'd)
Case
Haveg Corp. v. Guyer,
226 A.24 231 (Del. 1967) q.ccccerccvscsscccssccrscescsecssesesoconees
In re Hoe & Co., Inc.,
508 F.2d 1126 (2d Cir. 1974) ..esssscssssssessssssesessssessene
Int'l Brotherhood of Electrical Workers v. A-1
Electric Service,
535 F.2d 1 (10th Cir.), cert. denied,
429 U.S. 832 (1976) i ianiiicidintinninnicinnnniconesis
Int’! Brotherhood of Teamsters v. IML Freight, Inc.,
789 F.2d 1460 (10th Cir. 1986) ..ccccccsossossessesenssseessee
In re Landmark Hotel & Casino, Inc.,
S72 E2d SS7 (Sth Cis. 1989) «.....ccccrcccorececsssrsecceversesoecs
Local 461 v. Singer Co.,
540 F. Supp. 442 (D.N.J. 1982) -scceossceccesssssssesesesssees
Locke v. United States,
Se he Sen
Matter of Brada Miller Freight System, Inc.,
702 F.2d 890 (11th Cir, 1983) ..cccsscssccsscssseesesseeeesnees
Matter of Walway Co.,
69 B.R. 967 (Bankr. E.D. Mich. 1987)...
In re Mile Hi Metal System, Inc.,
899 F.2d S87 (10th Cir. 1990) ..........coccceseseseseseescenesense
Page
10
14
11
12
12
-Viii-
TABLE OF AUTHORITIES (cont'd)
Case
Mungin v. Florida East Coast Railway,
416 F.2d 1169 (Sth Cir, 1969) ..escoscsssssosssecssssseseeseeee
NLRB v. Bildisco & Bildisco,
TOE i iiiicettin ciliate
NLRB v. Haberman Constr. Co.,
618 F.2d 288 (Sth Cir. 1980), aff'd in relevant
part en banc, 641 F.2d 351 (Sth Cir. 1981)...
In re Royal Composing Room,
848 F.2d 345 (2d Cir. 1988), cert. denied,
489 U.S. 1078 (1989)
In re Salt Creek Freightways,
47 B.R. 835 (Bankr. D. Wyo. 1985) ......cssssss0e
Texas Industries v. Brown,
218 F.2d 510 (Sth Cir. 1955) ..rsccccsssssssssceseeeeeen
In re Texas Sheet Metals, Inc.,
90 B.R. 260 (Bankr. S.D. Tex. 1988)..............+.
Tn-State Generation & Transmission Ass'n v.
Shoshone River Power, Inc., 874 F.2d 1346
ETE ch TT eT ee
Truck Drivers Local 807 v. Bohack Corp.,
541 F.2d 312 (2d Cir. 1976) ..sssssssocscssssscnsceceeesenseeeee :
14
12
11
20
12
20
12
-ix-
TABLE OF AUTHORITIES (cont'd)
Case Page
In re U.S. Truck Co.,
89 B.R. 618 (E.D. Mich. 1988)..........-s-sessseeeenenees 12, 18, 20, 21
In re U.S. Truck Co.,
74 B.R. 515 (Bankr. E.D. Mich. | Tn 20
Union Bank v. Wolas,
112 S. Ct. 527 (1991) ..nesecceceseeeesensersnesennenencenenensenansnnnes 13
United States v. Ron Pair Enterprises, Inc.,
489 U.S. 235 (1989) ......eccececessssesrenescsnsneenenenenneneneneensnes 13
Universal Power System v. Godfather’s Pizza,
818 F.2d 667 (Sth Cir. 1987) .....-.....-s-rereeeseeneeseneenenees 20
Wheeling-Pittsburgh Steel Corp. v. United Steelworkers,
791 F.2d 1074 (3d Cir. 1986).........--cesessecrsneseeneeeneeneees 9,12
Workman v. Harmison,
282 F.2d 693 (10th Cir. 1960) .........c-sececeneneeeererenenennes 10
Young v. Higbee Co.,
324 U.S. 204 (1945) ......scccereseensseersnssersenssnsnsneeenenennenens 17
TABLE OF AUTHORITIES (cont'd)
Rules, Regulations and Statutes Page
United States Code:
11 U.S.C. § 57d [former] .................. 18
11 U.S.C. § 101(5)(A) ........ 18
11 U.S.C. $ 108(c)(2) 2
De Reiter nnenennnnenninnnmcneninennids 2, 3, 9, 19
OD ies BE eitintinrecterennesscemnerenennenasioniiiia 5, 9, 14, 15
0D Rte Piccenenttinrenccrnsernetnintctnnnntntsemie 15
OD al leiiietinnsisinerneiniiiininiaianmoninmen 2, 19
11 U.S.C. § 502(b)(1) 19
RS ee see 6
11 U.S.C. $ 5S02()(7)(A) (ii) ....-..cceseceseeceeseseecees 13
11 U.S.C. § 502(c) 6, 18
5S Cr ieiensscnnnstpthdnnicohetbbicnainin 5, 10, 15
Be Re esenisiheresieiecinhenieesiseitiiraniiipenitaniai 4
rE Te ee ee ee 2
FREE Ta 3) | Sena 2
SD Ts Ge SF C0 BOD. cecivittittcitnmniicentntiittatinanslai 10
I di innenrciscccnnnnanienniisnnentiicinnictaniiniiinten 2
A Rae Wittmann 2
FD a BOO eeretrnecresinmnncsttitiliiiahilil 2
BBR FB RE EN, ecictinsinctitsenns 4
-xi-
TABLE OF AUTHORITIES (cont'd)
Other Authorities
3 CoLLieER On Bankruptcy @ 502.03
(15th ed. 1992)......s.ccvcccserecsnecressnscensenecsnssseseneeseees
3 CoLureR ON Bankruptcy 9 502.07
(15th Od. 1992).........0vcrvcrvecrecssernssessnecsecsesenseseeseese
H.R. Rep. No. 595, 95th Cong.,
a
New Generation Research, Inc., THE 1991
BANKRUPTCY YEARBOOK & ALMANAC
(Ast Cd. 1991) .........csccrcceseseresessnsessssesressesnsnsseseeees
S. Rep. No. 989, 95th Cong., 1st Sess. 65 (1978) ...
W. Holloway & M. Leech, Employment
Termination Rights and Remedies (1985).........
Page
18
15
15
15
ate
The O'Neill Group hereby petitions for a writ of certiorari to
review the decision and judgment of the United States Court of
Appeals for the Fifth Circuit in the case known there as No. 89-
2347, In re Continental Airlines Corp.
OPINIONS BELOW
The opinion and judgment of the United States Court of Ap-
peals for the Fifth Circuit is reported at 901 F.2d 1259 (Sth Cir.
1990) (hereafter cited as Appendix A). The Court of Appeals is-
sued an unreported order denying timely petitions for rehearing
and suggestions for rehearing en banc (Appendix G). The March
13, 1989 order of the United States District Court for the
Southern District of Texas in this case is reproduced in Appendix
E. The opinion and judgment of the United States Bankruptcy
Court for the Southern District of Texas (Appendix D) is reported
at 64 B.R. 865 (Bankr. S.D. Tex. 1986).
JURISDICTION
This case concerns Continental's conduct in connection with its
first bankruptcy petition, which was filed in the United States
Bankruptcy Court for the Southern District of Texas, No. 83-
04019-H2-5, on September 24, 1983. The opinion and judgment
of the Fifth Circuit were entered on May 25, 1990. During the
period otherwise allowed to petitioners to petition for a writ of
certiorari, Continental filed a second bankruptcy petition in the
United States Bankruptcy Court for the District of Delaware, No.
90-932. To permit petitioners to confirm that this second -
bankruptcy petition stayed the present case pursuant to the auto-
matic stay provision of the Bankruptcy Code, this Court, on
January 9, 1991, extended the time for filing a petition for a writ
of certiorari to March 28, 1991, No. A-528. On March 21, 1991,
-2.
the Fifth Circuit confirmed that Continental’s second bankruptcy
stayed the appellate proceedings arising from the first bankruptcy
(Appendix H). Accordingly, the time for petitioning has been
automatically extended pursuant to 11 U.S.C. § 108(c)(2).
Within the extended time this Court otherwise allowed to peti-
tion for a writ of certiorari, petitioners moved the Bankruptcy
Court for the District of Delaware to lift the automatic stay (Ap-
pendix I). The Bankruptcy Court granted this motion for the
limited purpose of permitting this petition for a writ of certiorari
on May 12, 1992 (Appendix J). Therefore, this petition is filed
within the time period specified by 11 U.S.C. § 108(c)(2), and this
Court’s jurisdiction is invoked under 28 U.S.C. § 1254(1).
STATUTES INVOLVED
The relevant provisions of the Bankruptcy Code, 11 U.S.C.
§§ 365 and 502, and the Railway Labor Act (“RLA’), 45 U.S.C.
§§ 152, 155, and 156, are set forth in full in Appendix K.
STATEMENT OF THE CASE
This case involves claims by hundreds of former Continental
pilots and flight attendants for contract rejection damages pur-
suant to §§ 365 and 502 of the Bankruptcy Code. The claims arise
from Continental’s September 24, 1983, bankruptcy in which it
rejected its pre-existing collective bargaining agreements and im-
posed in their place “emergency work rules” that reduced wages
and benefits by more than half. Rather than accepting
Continental’s unilateral and drastic changes in their wages and
working conditions, the pilots and flight attendants embarked on
a lawful strike. This petition asks this Court to consider (1)
whether exercising their lawful right to strike divested these
| .
>
7
3.
employees of their statutory claim for damages, and (2) whether
contract rejection damages should be limited by a hypothetical
shutdown date.
A. The ALPA and UFA Labor Contracts.
For many years prior to September 24, 1983, Continental
employed pilots and flight attendants under terms and conditions
contained in labor contracts which it negotiated with the Air Line
Pilots Association (“ALPA”’) and with the Union of Flight Atten-
dants (“UFA”). The ALPA contract in force at the time of
Continental’s 1983 bankruptcy was dated August 18, 1982. In it,
the pilots gave Continental about $100 million in wage and
benefit concessions from their prior contract based on
Continental’s representation that it needed the concessions to
continue its operations.
B. Continental’s 1983 Bankruptcy, the Rejection of the
ALPA and UFA Contracts, and the Emergency Work
Rules.
On September 24, 1983, Continental ceased domestic flight
operations and filed a bankruptcy petition under Chapter 11. On
September 27, 1983, Continental filed a motion in bankruptcy
court to reject its labor contracts with ALPA and UFA pursuant
to 11 U.S.C. § 365. On that same day, just thirteen months after
the pilots had given the company $100 million in wage and benefit
concessions, Continental reopened its domestic flight operations
under drastically changed terms and conditions known as “Emer-
gency Work Rules.” The Emergency Work Rules cut employee
-4.
wages by more than half and increased their work hours.’ Con-
tinental did not negotiate with ALPA or the UFA over the Emer-
gency Work Rules, but required pilots and flight attendants to
work under them as a condition of continued employment.
C. The ALPA and UFA Strikes.
In response to the Emergency Work Rules, ALPA and UFA
commenced lawful economic strikes on October 1, 1983. All of
the petitioners honored and participated in their respective
unions’ strikes.
The UFA strike continued until April 17, 1985. On that date,
the UFA made an unconditional offer to return to work on behalf
of its striking members without reaching a strike settlement
agreement. The ALPA strike continued until October 31, 1985,
when the bankruptcy court entered an “Order and Award” con-
taining the terms of a secret strike settlement reached between
Continental and ALPA and presented to the bankruptcy court for
entry as a court order.2 On November 17, 1985, the court
amended the Order and Award to reflect subsequent changes
' For example, Continental cut the average captain’s salary from $90,000 to
$43,00 per year, the average first officer’s salary from $64,000 to $31,510 per year,
and the average second officer’s salary from $45,000 to $26,510 per year. In an
opinion rendered in connection with a striking pilot’s application for dislocated
workers’ benefits under the Airline Deregulation Act of 1978, 49 U.S.C. §§ 1301
et seq., the Department of Labor concluded that these drastic changes constituted
a “constructive furlough or termination” of the affected employee.
> This Court already has reviewed the Continental strike and its settlement in
Air Line Pilots Ass'n v. O'Neill, 111 S. Ct. 1127 (1991). Subsequent to
Continental's first bankruptcy, and in part because of it, Congress amended the
Bankruptcy Code to require at least a minimum of bargaining before employers
could reject their labor contracts. See 11 U.S.C. § 1113. This amendment leaves
intact the employer’s ultimate right to reject its labor contracts and the statutory
damages remedy at issue here.
-5-
negotiated by Continental and ALPA. Continental has not to date
negotiated a new labor contract with either ALPA or the UFA.
D. The Present Litigation.
1. The bankruptcy court’s dismissal of the pilots’ and
flight attendants’ contract rejection claims on
summary judgment.
The bankruptcy court approved Continental’s rejection of the
ALPA and UFA contracts on June 19, 1984 and December 5,
1984, respectively. The bankruptcy court’s rejection orders stated
that the contracts were rejected effective September 24, 1983, the
date of the bankruptcy filing. ALPA, on behalf of its pilot mem-
bers, and the UFA, on behalf of its flight attendant members, filed
proofs of claim for contract rejection damages under 11 U.S.C.
§§ 365(g) and 502(g).
Continental next filed a motion for partial summary judgment
on April 30, 1985, asking the bankruptcy court to disallow the
contract rejection claims of pilots and flight attendants for the
time they were on strike. The bankruptcy court granted
Continental’s motion on September 10, 1985 for the following
reason:
Under well-established principles of federal labor law, strik-
ing employees are not entitled to back pay for the period they
were on strike, even if the strike is a response to an unlawful
unfair labor practice by the employer.
Because the unions had objected to the bankruptcy court’s juris-
diction under 28 U.S.C. § 157(d) to interpret and apply federal
labor law, the bankruptcy court alternatively estimated the value
rs
of such claims as zero under 11 U.S.C. § 502(c) on the same
grounds.
On September 20, 1985, Continental filed an additional motion
for summary judgment in the bankruptcy court seeking to disallow
the remaining pilot and flight attendant claims for contract rejec-
tion damages, including claims for time not on strike. On May 8,
1986, the court granted the motion as to the flight attendants and,
on June 26, 1986, granted the motion as to the pilots. The follow-
ing grounds were stated for both rulings:
[B]ut for the Court’s rejection of the collective bargaining
agreements at issue here, [Continental] would have gone out
of business and [the employees] could not have claimed lost
future wages as damages, because the agreements did not
guarantee future employment.
Because of the unions’ jurisdictional objections, the bankruptcy
court again alternatively estimated the claims at zero under 11
U.S.C. § 502(c). Finally, although unnecessary to its holding, the
court also ruled that any employee claims for contract rejection
damages would be cut off as of the amendable dates of their labor
contracts and that the damages weuld be limited to one year’s
compensation under 11 U.S.C. § 502(b)(7).
2. The O’Neill Group intervention and appeals.
‘When the bankruptcy court dismissed the pilots’ remaining
contract rejection claims on June 26, 1986, it also held that proofs
of claim filed by ALPA and the UFA on behalf of their members
were improper, and permitted union members to intervene and
pursue their contract rejection damage claims as individuals. The
O’Neill Group previously intervened and filed a notice of appeal
xB
from the June 26, 1986 summary judgment ruling. By that time,
the UFA had appealed the bankruptcy court’s May 8, summary
judgment ruling against the flight attendants. Most of the flight
attendants in the O’Neill Group therefore intervened in the UFA
appeal.
The district court consolidated these appeals and scheduled
oral argument on the consolidated appeals (and several other
bankruptcy court appeals) for February 27, 1989. On that date,
the district court announced in open court, without oral argu-
ment, that it would affirm the bankruptcy court’s summary judg-
ment rulings, and entered an order to that effect on March 13,
1989.
The Fifth Circuit (Garwood, J. dissenting), upheld the
bankruptcy court’s ruling that contract rejection damages were
not available to the petitioners for the time they were on strike.
Analogizing to back pay cases under labor law, the court reasoned
that “[a]bsent constructive dismissal by the employer,” the
employees would not be entitled to back pay for the period of
time they were on strike (App. A at 13A). The Fifth Circuit never
determined whether there was a constructive dismissal by virtue
of Continental’s imposition of the emergency work rules, er-
roneously assuming that this question had been decided in a
separate bankruptcy proceeding. Judge Garwood dissented, and
pointed out that whether or not the employees were on strike,
they still should be entitled to recover the difference between
what they would have made under the rejected labor contracts
and what Continental actually paid. He wrote that to deny
employees all damages for the strike period “simply awards Con-
tinental a windfall” (App. A at 17A).
ltiesienineteneaiieemell
-8-
The Fifth Circuit also upheld the bankruptcy court’s ruling that
lost future wages were not recoverable where the debtor would
have gone out of business absent the contract rejection. On this
point, however, the Fifth Circuit remanded, holding that the
pilots and flight attendants were entitled to contract rejection
damages for the period Continental would have been able to con-
tinue operations under its labor contracts.
REASONS FOR GRANTING THE WRIT
I. The Fifth Circuit Opinion Creates An Unnecessary
Conflict Between The Right To Strike Guaranteed Under
The Railway Labor Act And The Right To Contract
Rejection Damages Guaranteed Under The Bankruptcy
Code.
We deal with a great national problem. Bankruptcy has become
an accepted business practice in modern America. In 1989 and
1990 alone, there were 38,348 Chapter 11 bankruptcy petitions
filed, involving such corporate giants as Federated Department
Stores and Southland Corporation. New Generation Research,
Inc., THE 1991 BANKRUPTCY YEARBOOK & ALMANAC 6, 32 (1st ed.
1991). The use of bankruptcy is especially common in the
transportation industry where Continental Airlines, Greyhound
Lines, Eastern Air Lines, and Braniff, to name but a few, have all
sought protection under Chapter 11. Jd. at 32-33.
> The Fifth Circuit also held that it was only harmless error when the
bankruptcy court judge accepted an offer of employment from the law firm
representing Continental shortly after approving an award of $700,000 in legal
fees to the firm.
—
- Aw
-9-
Under Section 365 of the Bankruptcy Code, employers in
bankruptcy are permitted to reject their collective bargaining
agreements and set new terms and conditions of employment. 11
U.S.C. § 365; NLRB v. Bildisco & Bildisco, 465 U.S. 513, 531
(1984). When so rejected, the agreement is deemed breached the
day before the Chapter 11 petition was filed, 11 U.S.C. § 365(g),
and the employees’ claims for damages are treated as unsecured
pre-petition claims. See NLRB v. Bildisco & Bildisco, 465 U.S. at
530 n.12. Numerous employers who have filed for bankruptcy
have used these provisions to finance their recoveries by cutting
labor costs. See, ¢.g., In re Mile Hi Metal Systems, 899 F.2d 887
(10th Cir. 1990); In re Landmark Hotel & Casino, Inc., 872 F.2d
857 (9th Cir. 1989); and Wheeling-Pittsburgh Steel Corp. v. United
Steelworkers, 791 F.2d 1074 (3d Cir. 1986).
The employees’ right to contract rejection damages is the quid
pro quo for the employer's ability in bankruptcy to reject its labor
contracts. The right to damages vests at the time the labor con-
tract is rejected. Nothing in the Bankruptcy Code states or even
suggests that the right to contract rejection damages is lost for any
period during which employees subsequently exercise their lawful
right to strike. Time and again, this Court has emphasized that the
right to strike “is integral to the [Railway Labor] Act.” Brother-
hood of Railroad Trainmen v. Jacksonville Terminal Co., 394 U.S.
369, 385-86 (1969). By misinterpreting the Bankruptcy Code, the
Fifth Circuit punished these employees and held that they were
compelled to continue working at whatever wages Continental
chose to pay them and under any conditions that Continental
chose to impose if they wanted to keep their damages claims
under the Bankruptcy Code (App. A, pp. 13A-16A). On this im-
portant point, the Fifth Circuit has unnecessarily and unwisely
created a conflict between the right to contract rejection damages
_ and the right to strike. The result is a “windfall” for Continental
and Judge Garwood rightly dissented.
¢?
-10-
A. The Fifth Circuit’s Decision Creates a New Class of
Indentured Servant — The § 502(g) Employee-Creditor.
Under § 502(g) of the Bankruptcy Code, an unsecured claim
for damages is the exclusive remedy available for a debtor’s
breach of a labor contract, replacing the labor law remedies other-
wise available outside of the bankruptcy. 11 U.S.C. § 502(g). In
NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1984), this Court ob-
served:
claims arising after filing, such as result from the rejection of
an executory contract, must also be presented through the
normal administration process by which claims are estirnated
and classified. See 11 U.S.C. § 502(g); In re Hoe & Co., Inc.,
508 F.2d 1126, 1132 (2d Cir. 1974); Workman v. Harrison, 282
F.2d 693, 699 (10th Cir. 1960). Thus, suit cannot be brought
against the debtor in possession under the collective bargain-
ing agreement; recovery may be had only through ad-
ministration of the claim in bankruptcy.
465 US. at 530.
If upheld, the ruling below will permit employers to hold this
unsecured interest hostage, forcing employees to choose between
working at whatever wage the employer imposes or withdrawing
their services and losing their sole remedy for their employer's
* Under the Railway Labor Act, 45 U.S.C. §§ 151 et seg., employees can
obtain an injunction requiring the employer to abide by its labor contract, back
pay for the time the employer did not follow the contract, and any other relief
necessary to place them in the same position they would have been in but for the
employer’s unlawful conduct. Mungin v. Florida East Coast Ry., 416 F.2d 1169
(Sth Cir. 1969).
ee
Ste
breach of the labor contract. There is no support in the
bankruptcy law for such an inequitable result.
First, the courts have uniformly held that rejection of an
employment contract may result in both rejection damages and a
strike. In Int’l Brotherhood of Teamsters v. IML Freight, Inc., 789
F.2d 1460 (10th Cir. 1986), for example, the Tenth Circuit
reversed the rejection of a collective bargaining agreement be-
cause, even though the employees were on strike, “both the
bankruptcy judge and the district court failed to recognize that
the rejections could generate burdensome claims against the es-
tate.” Id. at 1463. Thus, despite the strike, the court held that
“claims may be filed for all losses attributable to the non-perfor-
mance of the contracts, including payments due to all fringe
benefit plans, loss of seniority rights, and all other provisions of
the agreements.” Jd. The unavoidable conclusion from JML
Freight is that a strike does not alleviate the debtor’s liability for
rejection claims.
Second, the Code contains nothing that limits the ability of
employees to participate in lawful strikes, the most effective
economic weapon allowed by the labor laws. The result of the
Fifth Circuit’s decision is to allow debtors to use the bankruptcy
process to subvert employees’ labor law rights by effectively re-
quiring them to forfeit accrued rejection claims if they strike. This
is contrary to a substantial body of case law holding that the right
to strike remains intact despite a bankruptcy. See Briggs Transp.
5 See also In re Bildisco, 682 F.2d 72, 80 (3d Cir. 1982) (in balancing equities
to determine whether contract rejection should be allowed, bankruptcy court
must consider the likelihood of both a strike and large damage claims), aff'd, 465
U.S. 513 (1984); In re Salt Creek Freightways, 47 B.R. 835 (Bankr. D. Wyo. 1985)
(estimation of contract rejection damages required even though employees
struck after court-approved rejection).
-12-
Co. v. Int'l Brotherhood of Teamsters, 739 F.2d 341 (8th Cir.)
(bankruptcy court lacked jurisdiction to enjoin a strike or picket-
ing), cert. denied, 469 U.S. 917 (1984); Matter of Brada Miller
Freight Sys., Inc., 702 F.2d 890, 899 (11th Cir. 1983) (“the impact
of a potential strike on the debtor need alsc enter into the court’s
calculus”); Truck Drivers Local 807 v. Bohack Corp., 541 F.2d 312,
318 (2d Cir. 1976) (“By filing under Chapter 11 an employer does
not become clothed in immunity from union action.”).
B. The Fifth Circuit’s Decision Encourages the Massive
Defeat of Employees’ Rights Under the Bankruptcy and
Labor Laws. .
The Fifth Circuit decision, which is based on a serious
misinterpretation of the Bankruptcy Code, deprives more than
450 Continental employees of their sole remedy for Continental's:
breach of its labor contracts. While the magnitude of the harm in
this case alone is sufficient to warrant certiorari review, it is clear
that the situation of the pilots and flight attendants is not unique.
The rejection of labor contracts by debtors seeking to pay workers
less or avoid fixed damage claims for layoffs is a familiar occur-
rence. See In re Royal Composing Room, 848 F.2d 345 (2d Cir.
1988), cert. denied, 489 U.S. 1078 (1989); Wheeling-Pittsburgh
Steel Corp. v. United Steelworkers, 791 F.2d 1074 (3d Cir. 1986); Jn
re Texas Sheet Metals, Inc., 90 B.R. 260 (Bankr. S.D. Tex. 1988);
In re U.S. Truck, 89 B.R. 618 (E.D. Mich. 1988); Matter of Walway
-Co., 69 B.R. 967 (Bankr. E.D. Mich. 1987). If allowed to stand,
this result will invite employers to continue to reject labor con-
tracts and replace them with extremely harsh terms so as to en-
courage a strike and avoid liability for rejection damages. See
App. A at 17A (Garwood, J. dissenting) (describing this aspect of
majority’s opinion as a “windfall” for debtor).
-13-
C. The Fifth Circuit’s Decision, by Seriously
Misinterpreting the Applicable Law, Cuts Off
Petitioners’ Only Available Remedy for Continental’s
Breach.
The Fifth Circuit’s opinion means that a pilot like Joseph O’-
Neill who, after twenty years with the airline, had his contract
unilaterally rejected and his salary cut in half, is limited to contract
rejection damages amounting to seven days’ pay. The Fifth
Circuit’s holding is unsupported by bankruptcy law. Indeed, the
Code expressly contemplates that contract rejection damages are
recoverable even though “the employer directed the employee to
terminate, or such employee terminated, performance under such
contract.” 11 U.S.C. § 502(b)(7)(A)(ii). See Union Bank v. Wolas,
112 S. Ct. 527 (1991) (where law is clear, a heavy burden exists to
show Congress intended otherwise), United States v. Ron Pair
Enterprises, Inc., 489 U.S. 235 (1989).
The Fifth Circuit’s reliance on unfair labor practice back pay
cases to support its opinion is misplaced. The damages at issue
here are not statutory damages flowing from an unfair labor prac-
tice, but rather those flowing from Continental's court-approved
breach of its labor contract. Thus, the proper principles to apply
are those of contract law, not the NLRB’s rulings regarding
statutory back pay. This basic point was correctly raised in Judge
Garwood’s dissent, App. A at 17A.°
© when the debtor is allowed by the court to breach a labor contract by paying
reduced wages and benefits, employees are under a duty to mitigate their
damages by seeking other employment or continuing to work for the reduced
wages and benefits. Even assuming that the employees who went on strike failed
to mitigate their damages, such failure does not eliminate Continental's
responsibility for its contract breach; at most, the failure of the pilots and flight
attendants to mitigate reduces their claims by the amount Continental actually
(continued )
-14-
Even if the back pay cases applied, however, Continental’s
changes were so severe and pervasive that they constituted con-
structive discharge and justified back pay. See NLRB v. Haberman
Constr. Co., 618 F-2d 288, 296 (Sth Cir. 1980) (unilateral change
contrary to collective bargaining agreement is constructive dis-
charge), aff'd in relevant part en banc, 641 F.2d 351, 358-60 (Sth
Cir. 1981).’? The damages remedy for constructive discharge is lost
wages and benefits for the period of a strike, plus other equitable
relief not available here because of Continental's bankruptcy.®
Il. The Fifth Circuit’s Decision ' imiting Contract Rejection
Damages Misapplies Fundamental Principles Of Law On
Important Matters Going To The Heart Of The
Bankruptcy System.
When a debtor (read “employer”) rejects an executory con-
tract, the rejection is treated as a pre-petition breach. 11 U.S.C.
: (continued)
paid its working pilots. As stated by Judge Garwood, “there is no justification for
denying them recovery for the difference between the revised work rule pay rates
(and benefits) and those of the labor contracts; to do so simply awards
Continental a windfall.” App. A at 17A.
” The Panel avoided treating Continental’s institution of its “Emergency
Work Rules” as a constructive discharge by misconstruing Jn re Continental
Airlines Corp., 57 B.R. 845 (Bankr. S.D. Tex. 1985). The issue in that decision,
however, was whether Continental’s rejection was a “wrongful discharge” under
State law, not whether it was a “constructive” discharge. The court concluded that
the state law claim was preempted by the rejection remedy under the Code, and
reserved the issue for decision in connection with the pilots’ and flight attendants’
pending contract rejection claims. The Department of Labor subsequently held
that Conunental’s actions in this matter constituted a “constructive furlough or
termination.”
® See Florida East Coast Ry. Co. v. Brotherhood of Locomotive Engineers , 362
F.2d 482 (Sth Cir. 1966); Int'l Brotherhood of Elec. Workers v. A-1 Elec. Service,
535 F.2d 1 (10th Cir.), cert. denied, 429 U.S. 832 (1976); Film Projects, Inc., 231
N.L.R.B. No. 146 (1977).
-15-
§§ 365(g), 365(g)(1). To compensate for the rejection, the
creditors (read “employee”) receives an unsecured claim against
the estate for the contract damages flowing from the breach. 11
U.S.C. § 502(g); 3 Cotter On Bankruptcy 4 502.07 (15th ed.
1992). In short, the Bankruptcy Code:
gives entities injured by the rejection of an executory con-
tract... a pre-petition claim for any resulting damages, and
requires that the injured entity be treated as a pre-petition
creditor with respect to that claim.
H.R. Rep. No. 595, 95th Cong., Ist Sess. 354 (1977); S. Rep. No.
989, 95th Cong., Ist Sess. 65 (1978).
Purporting to apply this statutory scheme, the Fifth Circuit
determined that the pilots and flight attendants here could not
recover the bulk of the damages flowing from Continental’s
breach of its labor contracts with them because the agreements
did not guarantee future employment:?
The collective bargaining agreement in the present
case provides no guarantees of continued employment.
Hence, even if the present agreement had not been can-
celled, damages would only be available for the time Con-
tinental would have been able to continue in business. . . .
* In connection with this ruling, the Fifth Circuit remanded the case for a
finding of when Continental would have ceased operations, stating that contract
rejection darnages were available up to that point. This limited relief is largely
illusory, however, since the court also held that damages were not available for
the time pilots and flight attendants were lawfully on strike, which covers all but
one week of the period Continental would have remained in operation. See § I,
supra.
-16-
(App. A at 12A). Stated differently, the court’s analysis is:
(1) Continental would have eventually ceased operating had it
not rejected its labor contracts; (2) if this happened, the pilots
would not have jobs; and (3) without guaranteed jobs, no damages
could accrue.
A. Limiting Damages Based on Speculation of a Shutdown
Contravenes Basic Bankruptcy Law.
The Fifth Circuit opinion allows bankrupt employers who
breach their labor contracts to limit their employees’ claims for
damages by saying that it was only the breach of contract that al-
lowed them to remain in business.!° Not surprisingly, the decision
below is the only authority for this proposition.
1. The decision violates Bankruptcy Code
requirements for treating all creditors equally.
No bankruptcy authority supports the Fifth Circuit’s decision
to limit damages to “the time Continental would have been able
to continue in business.” App. A at 12A. The Bankruptcy Code
does not authorize, as part of the calculation of contract rejection
damages, a court to consider what would have happened without
the rejection or which of the debtor’s obligations caused the in-
solvency. Nor does the Code permit a court to disallow damages
for contracts that otherwise would have caused the debtor to
cease operations.
° Asnoted by one commentator: “If the same logic were followed in awarding
damages for the repair of a fender crumpled in an intersection collision, the
plaintiff would be denied full recovery for the fender because it might have been
damaged in some other way sooner or later.” W. Holloway & M. Leech,
Employment Termination Rights and Remedies at 402 (1985).
-17-
Not only is the Fifth Circuit’s decision unsupported by
bankruptcy law, it directly violates the fundamental tenet that all
creditors be treated equally. Young v. Higbee Co., 324 U.S. 204,
210 (1945). By limiting the employees’ damages to the time Con-
tinental hypothetically could have continued operations, the Fifth
Circuit violated this principle in treating the employees, qua un-
secured creditors, differently from and worse than other un-
secured creditors of Continental.
Specifically, Continental elected to reject its contracts with the
pilots and flight attendants and to continue operations. With the
exception of its employees, Continental paid all of its unsecured
creditors in full, even those whose contracts it rejected. Only the
pilots and flight attendants were not paid, even though the Fifth
Circuit’s imaginary demise of the airline should have affected all
unsecured creditors equally by cutting off payments to both
employees and nonemployees. In short, the Fifth Circuit allowed
Continental to use the unsecured interests of its pilots and flight
attendants to fly itself out of bankruptcy and pay off its other
creditors.
2. The ruling contradicts this Court’s decision in
NLRB »y. Bildisco & Bildisco.
In Bildisco, this Court held that contract rejection damages are
considered unsecured claims against the bankruptcy estate. As to
what items of damage were recoverable, this Court stated:
Section 502(c) provides that any contingent or unli-
quidated claim shall be estimated for purposes of settling a
bankrupt estate. Under this provision losses occasioned by
the rejection of a collective-bargaining agreement must be
tie
-18-
estimated, including unliquidated losses attributable to
fringe benefits or security provisions like seniority rights. . . .
465 US. at 530 n.12.
The limitation on future wages as contract rejection damages in
this case cannot be reconciled with Bildisco."' There is no logical
distinction between future fringe benefits and lost wages; both
arise only if the debtor continues to employ its workers. Accord In
re U.S. Truck Co., 89 B.R. 618, 624 (E.D. Mich. 1988) (rejecting
same debtor argument and holding “the logic in Bildisco extends
to lost future wages”). Unlike the court below, the Bildisco Court
"! The Fifth Circuit attempted to distinguish Bildisco by saying that it mereiy
attempted to clarify § 502(c), “which requires the estimation of unliquidated
claims if such are otherwise recoverable.” App. A at 11A (emphasis in original).
First, nowhere in its opinion did this Court imply that only “otherwise
recoverable” claims are to be estimated.
Second, the pilots’ and flight attendants’ claims in this case are “otherwise
recoverable.” In the 1978 amendments to the Bankruptcy Code, Congress
eliminated restrictions on the distribution of unliquidated or contingent claims
such as those here. See 3 COLLIER ON BANKRUPTCY 14 502.03, at 502-72 (15th
ed. 1992) (discussing former 11 U.S.C. § 57d). Under the Code as it now stands,
a recoverable claim includes any
right to payment, whether or not such right is reduced to
judgment, liquidated, unliquidated, fixed, contingent,
matured, unmatured, disputed, undisputed, legal, equitable,
secured, or unsecured ....
11 U.S.C. § 101(5)(A). See also Bildisco, 465 U.S. at 530 n.12 (noting that
Congress provided more protection to unsecured creditors, such as employees of
a debtor, whose interests were overlooked and underestimated in the past with
the 1978 Act). The Fifth Circuit’s reliance on the possibility that Continental
would have ceased operations returns bankruptcy law to its pre-1978 roots of
disallowing disputed or contingent claims. The policy of the Code now is to allow
these types of claims, and the possibility that the employer may cease operations
is irrelevant.
| cea
-19-
did not impose any added condition that employees claiming
rejection damages demonstrate a guarantee of continued employ-
ment.
B. The Fifth Circuit’s Decision Establishes a Measure of
Contract Rejection Damages Under § 502 That Is At
Odds With Basic Contract Law Principles.
As noted, an executory contract rejected under § 365 is treated
as a pre-petition breach which allows the nondebtor to recover
conventional contract damages. Section 502(b)(1) of the
Bankruptcy Code requires that the value of a § 365 breach is
determined in precisely the same way that such a claim would be
if a bankruptcy had not occurred. In limiting damages to the time
it thought Continental would have remained in business, the Fifth
Circuit abandoned the directive of § 502(b)(1) and contradicted
well-established case law on contract damages.
Accepting the Fifth Circuit’s premise that the labor contracts
here did not guarantee employment, then the contracts are, by
the lower court’s account, simple requirements contracts. The
buyer (Continental) agreed to fill its requirements for a particular
product (labor) over a specified period of time from a seller
(ALPA and the UFA), who agreed to make the product available
at a specified price (the terms of the labor contracts). It is beyond
dispute that a buyer subject to a requirements contract who meets
continuing needs by purchasing the product elsewhere is liable to
the seller for breach of contract, and that damages are the amount
-20-
“of the product the buyer acquired elsewhere, multiplied by the
contract price, less any mitigation.
These principles apply here. Continental continued to require
pilots and flight attendants after the filing of its bankruptcy peti-
tion, but obtained these services at prices below the terms of its
rejected labor contracts. Like any other requirements supplier,
the pilots’ and flight attendants’ damages must be based on the
Original contract terms and the requirements Continental sub-
sequently had, not speculation that Continental would have no
needs at all.
This is the result reached in the only other reported decision
addressing the measure of damages for rejection of a labor con-
tract. Jn re U.S. Truck Co., Inc., 89 B.R. 618 (E.D. Mich. 1988),
affg 74 B.R. 515 (Bankr. E.D. Mich. 1987). There, both the dis-
trict court and the bankruptcy court measured damages based on
the fact that the debtor continued to employ workers after reject-
ing its labor contract with them, rather than on a hypothetical
decision to go out of business, and expressly rejected the
bankruptcy court holding affirmed by the Fifth Circuit below. The
district court properly analyzed this issue as follows:
If U.S. Truck had ceased operations and liquidated, the
[employees] would have had no claim against it for future lost
wages....
'? See Tri-State Generation & Transmission Ass' hone River Power,
Inc., 874 F.2d 1346, 1362 (10th Cir. 1989); Uni Sys. v. Godfather’s
Pizza, 818 F.2d 667, 673 (8th Cir. 1987); Center Ci al Co. v. Avril, Inc., 392
F.2d 289 (Sth Cir. 1968); Globemaster, Inc. v. Magic American Chemical Corp.,
386 F.2d 420 (6th Cir. 1967); Locke v. United States, 283 F.2d 521 (Ct. Cl. 1960);
Texas Industries v. Brown, 218 F.2d 510 (Sth Cir. 1955); Haveg Corp. v. Guyer,
226 A.2d 231 (Del. 1967).
; -21-
[However,] U.S. Truck and its trustee determined that the
interests of the creditors and the debtor were best served by
continued economic activity. Therefore, a decision was made
that employment should continue during the period of time
that the claimed damages accumulated. This situation of con-
tinuing employment has no relation to a context where no
employment was available during specific parts of a
company’s annual business cycle. In fact, to the extent the
court should look to the actual operations of the company to
determine what damage award is appropriate, the continued
employment of part of U.S. Truck’s workforce militates in
favor of finding damages for pay lost through the 10-percent
reduction in wages. ...
[T]he court cannot say what would have happened had the
company decided to liquidate. A buyer might have been
found; for example, who would have continued the opera-
tions of U.S. Truck. Rather than speculate as to what might
have occurred, the court believes it is the better course to
look at the actual events. Because U.S. Truck continued to
employ workers, these workers should be an unsecured
creditor for the difference between what they were paid and
the amounts contemplated by the Agreement.
89 BR. at 625-26. See also Local 461 v. Singer Co., 540 F. Supp.
442, 450 (D.N.J. 1982). By failing to distinguish or reconcile U.S.
Truck, the Fifth Circuit’s decision creates great uncertainty in this
area of the law.
The Fifth Circuit’s opinion places the entire burden of
Continental’s bankruptcy on one discrete group of creditors —
the employees — and, in doing so, ignores the fundamental con-
7
P| —— ae
2).
tract law principle that speculation about what “might have been”
cannot support or limit an award of damages.
CONCLUSION
The decision below conflicts with basic bankruptcy and labor
law. The Fifth Circuit’s view of the Bankruptcy Code as it applies
to the determination of contract rejection damages is not only
seriously in error, but is fundamentally harsh and unjust. In light
of the central role of labor contracts in the econofmic arena, and
the increasing use of the bankruptcy laws by employers, the public
importance of this question is so great that this petition should be
granted.
RESPECTFULLY SUBMITTED, June 1992.
* MarTY HARPER
RANDOLPH J. HAINES
ALLEN CLARKE
JANET NAPOLITANO
LEwIs AND ROCA
40 North Central Avenue
Phoenix, Arizona 85004
(602) 262-5311
* Counsel of Record for Petitioner
TABLE OF CONTENTS
TO APPENDICES
shad es Kcemannaasite memes — |
A— Inre Continental Airlines Corp., 901 F.2d 1259 (Sth Cir.
1990)
B— Order Granting Debtors’ Motion For Partial Summary
Judgment/Uncontested Facts And Conclusions Of Law
| Relative To Debtors’s [sic] Motion For Summary Judg-
ment With Respect To Contract Rejection Claims Of
Strikers, U.S. Bankruptcy Court, Southern District of
Texas, filed September 10, 1985
C— Order/Findings Of Fact And Conclusions Of Law With
- Respect To The Union Of Flight Attendants(’] Claims
For Contract Rejection Damages, U.S. Bankruptcy
Court, Southern District of Texas, dated May 8, 1986
D— Order/Findings Of Fact And Conclusions Of Law With
Respect To Motion To Disallow Or To Estimate At
Zero Value The Contract Rejection Damages Claims
Filed By The Air Line Pilots Association, U.S.
Bankruptcy Court, Southern District of Texas, dated
June 26, 1986
E— Order, filed March 13, 1989, affirming Bankruptcy
Court’s Orders of September 10, 1985, May 8, 1986 and
June 26, 1986, U.S. District Court, Southern District of
Texas
F— Memorendum & Order, U.S. District Court, Southern
District of Texas, entered August 4, 1989
H —
-ii-
Order denying Petition for Rehearing and Suggestions
for Rehearing En Banc, U.S. Court of Appeals for the
Fifth Circuit, filed October 29, 1990
Order/Appendix, automatically staying the appeal, U.S.
Court of Appeals for the Fifth Circuit, dated March 21,
1991
Motion for Relief from Automatic Stay, by Joseph E.
O’Neill, et al., filed March 28, 1991
Order granting O’Neill Group’s motion in part for the
limited purpose of allowing O’Neill Group to file a Peti-
tion for Writ of Certiorari with the U.S. Supreme Court,
U.S. Bankruptcy Court, District of Delaware, dated
May 12, 1992
The relevant statutes:
11 U.S.C. § 365
11 U.S.C. § 502
45 U.S.C. § 152
45 U.S.C. § 155
45 U.S.C. § 156
APPENDIX A
In re CONTINENTAL AIRLINES Corp., et al., Debtors.
Ar Line Pitots AssociaTION, INTERNATIONAL and
James C. Stephens, et al., Appellants,
Vv.
CONTINENTAL AIRLINES, INc., et al., Appellees.
O’NerLt Group, Appellants,
V.
CONTINENTAL AIRLINES, INc., et al., Appellees.
UNION OF FLIGHT ATTENDANTS, Appellant,
v.
CONTINENTAL AIRLINES, INc., et al., Appellees.
No. 89-2347.
United States Court of Appeals, Fifth Circuit.
May 25,1990.
Randolph J. Haines, Marty Harper, Allen Clarke, Jessica
Franken, Lewis & Roca, Phoenix, Ariz., for appellants.
Reginald H. Wood, William Schweinle, Jr., Stubbeman,
McRae, Sealy, Laughlin & Browder, Houston, Tex., for O’Neil
Group.
2A
James R. O’Donnell, Leon V. Komkov, Butler & Binion, Hous-
ton, Tex., for Stephens Group.
Barbara Gardner, Mandell & Wright, Houston, Tex., Bruce
Simon, Babette Ceccotti, Cohen, Weiss, & Simon, New York City,
Kathleen M. Schaden, Schaden, Heldman & Lampert, Denver,
Colo., Christopher Cameron, Taylor, Roth, Bush & Geffner, Bur-
bank, Cal., Daniel P. Casey, Continental Airlines, Inc., Houston,
Tex., for appellees.
John J. Gallagher, Charles L. Warren, Jon A. Geier, Aiken,
Gump, Strauss, Hauer & Feld, Washington, D.C., Lenard Parkins,
Sheinfeld, Maley & Kay, Houston, Tex., for Continental Airlines,
Inc.
Appeals from the United States District Court for the Southern
District of Texas..
Before GEE, REAVLEY, and GARWOOD, Circuit Judges.
GEE, Circuit Judge:
Today’s case presents the question whether employees whose
collective bargaining agreements are rejected in a Chapter 11
bankruptcy are entitled to future wages and benefits as contract
rejection damages under 11 U.S.C. § 502(g). Recognizing that the
agreements here at issue do not guarantee employment, we hold
that the difference between the wages and benefits set out in the
agreements and the wages and benefits actually paid under the
emergency work rules are recoverable as unsecured claims to the
extent that work would have been available had the agreements
not been rejected. The bankruptcy court dismissed all employee
claims without considering how long Continental could have
3A
remained in business absent rejection of the agreements. For this
and other reasons to be stated, we reverse and remand the cause
to the bankruptcy court to allow it to make a specific finding of
when Continental would have had to cease operations had it not
cancelled its labor contracts, and to calculate appropriate
damages to that date.
I. Facts
In 1983, Continentai halted domestic flight operations and filed
a bankruptcy petition under Chapter 11. Continental then filed a
motion in bankruptcy court to reject its labor contracts with the
Air Line Pilots Association, International (““ALPA”) and the
Union of Flight Attendants (“UFA”) pursuant to 11 U.S.C. Sec-
tion 365. That same day, Continental recommenced its domestic
flights under what it termed “Emergency Work Rules,” rules that
changed dramatically the employees’ terms and conditions of
employment. As a result, ALPA and UFA called strikes.
The bankruptcy court approved Continental’s rejection of its
labor contracts with ALPA and UFA and ordered the rejection
effective the date of the bankruptcy filing. ALPA and UFA then
filed proofs of claim, in amounts of $408 million and $409 million
respectively, for contract rejection damages under 11 U.S.C. Sec-
tions 365(g) and 502(g). These claimed damages consisted of the
full wages and benefits set forth in the rejected labor contracts,
for time periods beginning from the date of the bankruptcy filing
up to and somewhat beyond the contracts’ amendable dates.
In October of 1985, Bankruptcy Judge T Glover Roberts, ac-
ting by agreement between Continental and ALPA, signed an
“Order and Award” that was intended to settle all issues between
Continental and ALPA, including the contract rejection damage
4A
claims. Because of objections raised by certain individual pilots,
the court allowed pilots who did not participate in the settlement
to file proofs of claim and pursue their derivative share of the
claims originally filed by ALPA. A like settlement agreement was
reached between Continental and UFA, with a procedure created
which was similar to that for the pilots, allowing non-settling flight
attendants to pursue their claims independently of UFA. In all,
approximately 460 pilots and 14 flight attendants have filed proofs
of claim seeking contract rejection damages under the procedures
established by the bankruptcy court.
In a motion for partial summary judgment, Continental next
asked the bankruptcy court to disallow contract rejection
damages claims for the time that the employees were on strike.
When that motion was granted on September 10, 1985 (“Septem-
ber 10 Order”), Continental filed an additional motion for sum-
mary judgment seeking to disallow the remaining claims for
contract rejection damages. This was granted as to the claims of
the flight attendants on May 8, 1986 (“May 8 Order”), and as to
the pilots’ claims on June 26 of the same year (“June 26 Order”).
The court reasoned that as the collective bargaining agreements
did not guarantee employment, the claimants were not entitled to
future wages and benefits as contract rejection damages. The or-
ders were appealed to federal district court, which affirmed them.
II. Discussion
A. Failure to Stand Recused
The appellants contend that Judge Roberts, who shortly after
making his May 8 and June 26 orders received and accepted an
offer for partnership in the law firm representing Continental,
ode! SN a he
SA
should have stood recused from the case and that his failure to do
so requires the reversal of those orders.
Several months before making his rulings in this case, Judge
Roberts had announced his intentions to enter private practice
and to stop handling the Continental bankruptcy cases to avoid
conflicts of interest in the event he considered employment with
any of the firms appearing before him. Shortly thereafter,
Continental's local bankruptcy counsel, Messrs. Sheinfeld, Maley
& Kay (“Sheinfeld”), discussed hiring Judge Roberts at a partner-
ship meeting. Before his confirmation of Continental’s pian of
reorganization, at least two Sheinfeld lawyers had asked Judge
Roberts about his future employment plans. At about the same
time, Judge Roberts was quoted as praising Continental's Presi-
dent Frank Lorenzo in articles which appeared in Business Week
and the Wall Street Journal.'
Judge Roberts granted summary judgment disallowing all con-
. tract rejection damage claims in orders made on May 8 and June
26,1986, and confirmed Continental’s plan of reorganization on
June 30. On July 1, Judge Roberts granted various fee requests
made by counsel, including a $700,000 fee to Sheinfeld. On July
2, Sheinfeld contacted Judge Roberts about joining their partner-
ship. On July 29, Judge Roberts agreed to join the firm and did so
on September 5 of the same year.
28 U.S.C. Section 455(a) requires a judge to stand recused “in
any proceeding in which his impartiality might reasonably be
ae udge Roberts was reported to have said concerning Frank Lorenzo: “Who
do you know with the guts to put half a billion dollars on the table and say he can
do a turnaround’ of a company that is a prime candidate for bankruptcy... If
anybody can do it, Lorenzo can.” Frank Lorenzo, High Flier, Business Week,
March 10, 1986 at 104, 107.
6A
questioned.” Because the goal of Section 455(a) “is to exact the
appearance of impartiality,” recusal may be mandated even
though no actual partiality exists. Hall v. Small Business Admin.,
695 F.2d 175, 178 (Sth Cir. 1983). The standard for recusal is an
objective one, that if a “reasonable man, were he to know all the
circumstances, would harbor doubts about the judge’s impar-
tiality.” Health Services Acquisition Corp. v. Liljeberg, 796 F.2d 796,
800 (Sth Cir. 1986), aff'd, 486 U.S. 847, 108 S. Ct. 2194, 100 L. Ed.
2d 855 (1988).
In the present case there is no allegation that, prior to his
rulings in this case, Judge Robderts had sought employment with
the Sheinfeld firm, or that he knew that the firm was actively con-
sidering him. The close coupling of Judge Roberts’s rulings with
the employment offer and his acceptance of it, however, does cre-
ate the appearance that he may have been pursuing employment
with Sheinfeld while he was presiding over the case. As the
Seventh Circuit noted in Pepsico, Inc. v. McMillen, 764 F.2d 458,
461 (7th Cir. 1985):
The appearance of equal justice requires that the judge not
be exploring the prospects of employment with one lawyer or
all lawyers appearing in a case before him. The dignity and
independence of the judiciary are diminished when the judge
comes before the lawyers in the case in the role of a suppliant
for employment. The public cannot be confident that a case
tried under such conditions will be decided in accordance
with the highest traditions of the judiciary.
Id. at 461.
Continental contends that a judge cannot be expected to stand
recused in a case when he is unaware that counsel for one of the
7A
parties appearing before him is considering him for employment.
The Supreme Court, in Liljeberg v. Health Services Corp.,
responded to a similar contention:
Contrary to petitioner’s contentions, this reading of the
statute does not call upon judges to perform the impos-
sible — to disqualify themselves based on facts they do not
know. If, as petitioner argues, § 455(a) should only be ap-
plied prospectively, then requiring disqualification based on
facts the judge does not know would of course be absurd; a
judge could never be expected to disqualify himself based on
some fact he does not know, even though the fact is one that
perhaps he should know or one that people might reasonably
suspect that he does know. But to the extent the provision
can also, in proper cases be applied retroactively, the judge
is not called upon to perform an impossible feat. Rather, he
is called upon to rectify an oversight and to take the steps
necessary to maintain public confidence in the impartiality of
the judiciary. If he concludes that “his impartiality might
reasonably be questioned,” then he should also find that the
statute has been violated. This is certainly not an impossible
task.
486 U.S. 847, 861, 108 S. Ct. 2194, 2202-03, 100 L. Ed. 2d 855, 873
(1988). Similarly, to hold that § 455(a) was violated in the present
case does not mean that Judge Roberts was required to stand
recused before discovering that he was being considered for
employment. Rather, when an offer of employment was received
the day after his approval of $700,000 in legal fees to the firm
making the offer, Judge Roberts was “required to take the steps
necessary to maintain public confidence in the judiciary.” In the
circumstances of this case Judge Roberts should either have
rejected the offer outright, or, if he seriously desired to consider
8A
accepting the offer, stood recused and vacated the rulings made
shortly before the offer was made. Although we are confident that
Judge Roberts committed no substantive impropriety in his han-
dling of the motions in this case, we nevertheless conclude that
recusal was mandated by the appearances of the situation which
we have described.
Although a violation of § 455(a) has occurred in the present
case, reversal is not automatic. As with other areas of the law, the
“harmless error” rule applies to a breach of a judge’s duty to stand
recused under § 455(a). Liljeberg, 486 U.S. at 861-62, 108 S. Ct. at
2202-03, 100 L. Ed. 2d at 873-74. In determining whether reversal
is mandated by a failure to stand recused, a number of factors
warrant our careful consideration: The risk of injustice to the par-
ties in this particular case; the risk that the denial of relief will
produce injustice in other cases; the risk of undermining the
public’s confidence in the judicial process. Jd. at 864, 108 S. Ct. at
2204, 100 L. Ed. 2d at 875.
The risk of injustice to the parties in allowing a summary judg-
ment ruling to stand is usually slight. Such rulings are subject to
de novo review, with the reviewing court utilizing criteria identi-
cal to that used by the court below. In cases where we would
otherwise affirm such a ruling, little would be gained by vacating
and remanding with instructions that it be essentially reinstated.”
> ‘The Eleventh Circuit noted in a similar situation:
As discussed previously, we agree with the district court that
summary judgment was proper. It would, therefore, be
ridiculous to remand this case and reassign it to another judge
after we have already exercised plenary review and have
concluded that summary judgment was proper.
Parker v. Connors Steel Co., 855 F.2d 1510, 1526 (11th Cir. 1988), cert. denied,
— US. —, 109 S. Ct. 2066, 104 L. Ed. 2d 631 (1989).
9A
Next, we consider whether a failure to vacate the orders below
would be likely to produce injustice in other cases. We seriously
doubt that a failure to vacate the decisions of the bankruptcy
court could be read in future cases as a nod of approval for Judge
Roberts’s handling of the situation; rather, our ruling here should
serve as a caution to other judges who are contemplating private
employment following retirement. Moreover, were we to vacate
the orders below for the § 455 violation alone, injustice to other
Continental creditors might result from the delay in finishing
Continental's plan of reorganization.
Finally, we consider whether the public’s confidence in the judi-
cial process will be undermined if we hold Judge Roberts’s viola-
tion of Section 455(a) to be harmless error. We are aware of the
high profile the Continental bankruptcy has had before the public
and that the circumstances surrounding Judge Roberts’s retire-
ment from the bench have not gone unnoticed by the press.> That
we have ruled Judge Roberts’s actions to be violative of Section
455(a) should serve to restore some of any public confidence lost
as a result of the violation; whether vacating the orders granting
summary judgment for the sake of appearances alone would help
or hinder the restorative process, however, is not clear. As the
Eleventh Circuit has noted, in similar circumstances:
In fact, if we reverse and vacate a decision that we have al-
ready determined to be proper, the public will lose faith in
our system of justice because the case will be overturned
without regard to the merits of the employees’ claims. Judi-
cial decisions based on such technical arguments not relevant
to the merits contribute to the public’s distrust in our system
of justice.
5 See Texas Lawyer, Dec. 1-5, 1986, at 1; Wall St.J., Oct. 6, 1986, at 24, col. 1.
i I
10A
Parker v. Connors Steel Co., 855 F.2d 1510, 1527 (11th Cir. 1988),
cert. denied, — U.S. — , 109 S. Ct. 2066, 104 L. Ed. 2d 631 (1989).
We accordingly hold that the Section 455(a) violation in the
present case constituted harmless error.
B. Contract Rejection Damages
Bankruptcy Code Section 365 permits an employer to reject a
collective bargaining agreement and set new terms and conditions
of employment. 11 U.S.C. § 365; NLRB v. Bildisco & Bildisco, 465
U.S. 513, 531, 104 S. Ct. 1188, 1198-99, 79 L. Ed. 2d 482 (1984).
When so rejected, the agreement is deemed breached the day
before the Chapter 11 petition was filed. 11 U.S.C. § 365(g). Sec-
tion 502(g) provides a remedy for this breach in lieu of the labor
law remedies which would have been available outside
bankruptcy. The appellants contend that, in addition to accrued
wages and benefits, future wages and benefits are recoverable as
of right as Section 502 contract rejection damages.
In support of their contention that the district court erred in
rejecting their damage claims, the appellants rely principally upon
NLRB v. Bildisco & Bildisco, 465 U.S. 513, 104 S. Ct. 1188, 79 L.
Ed. 2d 482 (1983), in which the Supreme Court held that the
authority of a debtor-in-possession to seek the rejection of a col-
lective bargaining agreement was not subject to the modification
restrictions of Section 8(d) of the NLRA. In a footnote the Court
stated that the “losses occasioned by the rejection of a collective-
bargaining agreement must be estimated, including unliquidated
losses attributable to fringe benefits or security provisions like
seniority rights.” Jd. at 530 n. 12, 104 S. Ct. at 1198 n. 12. The
appellants read this portion of the opinion as mandating the
award of contract rejection damages whenever a collective bar-
gaining agreement is breached. The plaintiffs fail to recognize,
11A
however, that this footnote was simply the Court’s attempt at
clarifying Section 502(c), which requires the estimation of unli-
quidated claims if such are otherwise recoverable. Id. at 530, 104 S.
Ct. at 1198. Whether certain types of damages are recoverable
under Section 502 will depend upon the particular contract at
issue and the circumstances surrounding its rejection.
1. Collective bargaining agreements
Unlike a contract of employment, ordinarily a collective bar-
gaining agreement does not create an empiloyer-employee
relationship; and its rejection does not terminate an employment
relationship. It neither obligates any employee to perform work
nor requires the employer to provide work. It is simply “a general-
ized code to govern a myriad of cases which the draftsman cannot
wholly anticipate. . . . The collective agreement covers the whole
employment relationship. It calls into being a new common law —
the common law of a particular industry or of a particular plan.”
John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543, 550, 84 S. Ct.
909, 915, 11 L. Ed. 2d 898 (1964). As has been noted by the
Supreme Court:
[C]ollective bargaining between employer and the repre-
sentatives of a unit, usually a union, results in an accord as to
the terms which will govern hiring and work and pay in that
unit. The result is not, however, a contract of employment
except in rare cases; no one has a job by reason of it and no
obligation to any individual ordinarily comes into existence
from it alone. The negotiations between union and manage-
ment result in what often has been called a trade agreement, _
rather than in a contract of employment.
i
12A
J.I. Case Co. v. National Labor Relations Board, 321 U.S. 332, 335,
64 S. Ct. 576, 579, 88 L. Ed. 762 (1944). Unless a collective bar-
gaining agreement guarantees future employment, lost future
wages and benefits as damages for its breach are not recoverable
in periods when no work would have been available. See, e.g.,
NLRB v. Biscayne Television Corp., 337 F.2d 267, 268 (Sth Cir.
1964); Nabors v. NLRB, 323 F.2d 686, 690 (Sth Cir. 1963), cert.
denied, 376 U.S. 911, 84S. Ct. 666, 11 L. Ed. 2d 609 (1964); NLRB
v. Columbia Tribune Publishing Co., 495 F.2d 1384, 1393 (8th Cir.
1974).* Likewise, employees working under such an agreement
are not entitled to lost future wages if the employer ceases opera-
tions. See, e.g., J.J. Case, supra; Fraser v. Magic Chef — Food Giant
Markets, Inc., 324 F.2d 853 (6th Cir. 1963); Bakery & Confection-
ary Workers Intern. Union of America v. Great Atlantic & Pacific
Tea Co., 357 F. Supp. 1322 (W.D. Pa. 1973), aff'd mem., 491 F.2d
748 (3d Cir. 1974); Abbington v. Dayton Malleable, Inc., 561 F.
Supp. 1290 (S.D. Ohio 1983), aff'd mem., 738 F.2d 438 (6th Cir.
1984).
The collective bargaining agreement in the present case
provides no guarantees of continued employment. Hence, even if
the present agreement had not been cancelled, damages would
only be available for the time Continental would have been able
to continue in business. In rejecting all of the appellants’ damage
claims, Judge Roberts relied upon a previous finding, not here
appealed, “that had Continental not made its unilateral changes
in pilot pay and work rules[ ] it would have been unable to con-
2 Although these cases were decided under the NLRA (the present contract
is governed by the RLA), courts have often looked to decisions under the NLRA
for guidance in RLA matters. See generally Trans World Airlines, Inc. v.
Independent Federation of Flight Attendants, 489 U.S. 426, 109 S. Ct. 1225, 1230,
103-L-Ed. 2d 456 (1989); Brotherhood of Railroad Trainmen v. Jacksonville
Terminal Co., 394 U.S. 369, 383, 89 S. Ct. 1109, 1117-18, 22 L. Ed. 2d 344 (1969).
13A
tinue its operations for very much longer for want of necessary
cash,” and that absent the implementation of the September 27
Emergency Work Rules, “Continental would have run ... [out] of
cash” and “would have had to shut its doors even before this hear-
ing commenced,” that date being January 30,1984. Recognizing
that if Continental went out of business, the employees would
have no damage claims under the agreement, Judge Roberts held
that no damages should be available under Section 502(g). Al-
though the reasoning utilized by Judge Roberts in rejecting the
claims parallels our own here, he failed to recognize that the find-
ing relied upon suggests that Continental could have continued to
operate under its labor contracts for some period of up to four
months following September 27, 1983. As the employees operat-
ing under the agreement would have had a claim for damages —
accruing until Continental ceased operations — had the contract
not been rejected, they are entitled to contract rejection damages
for the same period. These damages are to be considered un-
secured claims measured by the differences in the rates of pay and
fringe benefits set forth in the agreements and the pay and
benefits actually received under the Emergency Work Rules.
2. Effect of the strike
The appellants contend that contract rejection damages should
be available for the time the employees were out on strike. As
noted above, the purpose of Section 502(g) is to give the same
remedy as would be available had the contract not been rejected.
Absent constructive dismissal by the employer,’ employees who
strike are not ordinarily entitled to back pay for the period for
> Ina previous order not here appealed, the bankruptcy court held that
Continental's action in rejecting its collective bargaining agreements did not
constitute a constructive discharge. In re Continental Airlines Corp., 57 B.R. 845
(Bankr. S.D. Tex. 1985).
i a
14A
time they are on strike, even if the strike is in response to an unfair
labor practice. See Phelps Dodge Corp. v. NLRB, 313 U.S. 177, 198
n. 7, 61 S. Ct. 845, 854 n. 7, 85 L. Ed. 1271 (noting that the NLRB
does not award backpay for an unfair labor practice strike); J.H.
Rutter-Rex Manuf. Co. v. NLRB, 399 F.2d 356, 361 (Sth Cir. 1968),
rev'd on other grounds, 396 U.S. 258, 90 S. Ct. 417, 24 L. Ed. 2d
405 (1969) (liability for backpay to unfair labor practice strikers
begins with application for reinstatement); Studio 44, Inc., 284
N.L.R.B. No. 67 at 13 n. 22 (1987) (“It is well settled that unfair
labor practice strikers are not entitled to reinstatement and back-
pay until they have made an unconditional offer to return to
work”); Comfort, Inc., 152 N.L.R.B. 1074, 1090 (1965), enforced,
NLRB v. Comfort, Inc., 365 F.2d 867 (8th Cir. 1966). As no
damages would have been available to Continental employees for
the time when they were on strike outside of bankruptcy, none
should be given in this instance.
The cases relied upon by the appellants do not dictate a dif-
ferent outcome. For example, the appellants cite our decisions in
Mungin v. Florida East Coast Railway Co., 416 F.2d 1169 (Sth Cir.
1969) and United Industrial Workers v. Board of Trustees of Galves-
ton Wharves, 400 F.2d 320 (Sth Cir. 1968), cert. denied, 395 U.S.
905, 89 S. Ct. 1747, 23 L. Ed. 2d 219 (1969), in support of their
contention that a back pay remedy is available for striking
employees. In both of these cases the disputed actions of the car-
riers constituted violations of § 6 of the Railway Labor Act, for
which we ruled that back-pay could be awarded as a sanction, cal-
culated from the time of the wrongful discharge until the
employees were reinstated pending bargaining. Jd. at 328. We
noted that the purpose of the sanction was to recreate, so far as
possible, the status quo before the wrongful action was taken and
to maintain it until the carriers complied with the good faith bar-
gaining required by § 6 of the Act. Jd. at 329.
15A
The plaintiffs’ reliance upon Mungin and Galveston Wharves in
the present instance is misplaced. Continental's rejection of the
collective bargaining agreement, unenforceable from the time of
the bankruptcy filing, involved no statutory violation.® In conse-
quence, we ave no such concern to preserve the status quo pend-
ing statutory compliance as we had in Mungin and Galveston
Wharves. We noted the distinction between cases involving
statutory violations and those involving breach of contract in both
Galveston Wharves and Mungin when we stated: “‘But the
employees here do not claim backpay for a breach of contract.
Their claim arises out of a violation of the federal statute. The
contract-dispute cases therefore are not relevant.”” Mungin, 416
F.2d at 1177 (quoting Galveston Wharves, 400 F.2d at 327).
Similarly, as the claims here involved are for contract rejection
damages, our holdings concerning sanctions for statutory viola-
tions are not relevant.
Another case relied upon by the appellants, Carpenter Sprinkler
Corp. v. NLRB, 605 F.2d 60 (2d. Cir. 1979), actually supports our
ruling here. In Carpenter, an employer's unilateral change in
wages and benefits prompted its union employees to strike. An
Administrative Law Judge found the employer to have committed
an unfair labor practice and ordered the strikers be reinstated
with back pay. This order was modified by the NLRB to include a
back pay award for the strike replacements as well. On appeal, the
® In Bildisco, the Supreme Court ruled that “the filing of the petition in
bankruptcy means that the collective-bargaining agreement is no longer
immediately enforceable, and may never be enforceable again.” 465 U.S. at 532,
104 S. Ct. at 1199. The Court held that an employer did not commit an unfair
labor practice by unilaterally imposing new conditions of employment between
the time of bankruptcy filing and the time the contract is either affirmed or
avoided. Jd. This holding has been superseded by statute. See 11 U.S.C. § 1113.
The new statute does not apply, however, to bankruptcy petitions such as this one,
filed before July 10, 1984.
16A
court in Carpenter enforced only that portion of the Board’s order
which awarded back pay to the reinstated strikers. The appellants
assume that the back pay was to run from the beginning of the
strike. A reading of the Board’s order itself, however, reveals that
the award was to consist of “the difference between the wages and
other economic benefits which [the workers] actually received and
the economic benefits which they would have received absent
Respondent’s unlawful conduct.” 238 N.L.R.B. 974, 976 (1978).
The Board ruled that the employer’s “liability for back pay shall
commence as of the date of the employee’s unconditional offer to
return to work.” Jd. (citing Newport News Shipbilding and Dry
Dock Co., 236 N.L.R.B. 1637 (1978)).
Ill. Conclusion
The September 10 order of the bankruptcy court granting the
debtor’s motion for partial summary judgment, which disallowed
contract rejection damages for time periods the employees were
out on strike, is AFFIRMED. The May 8 and June 26 orders of
the bankruptcy court granting the debtor’s motion for summary
judgment, which disallowed all contract rejection damage claims
of the appellants, are VACATED and the cause REMANDED
for proceedings consistent with this opinion.
GARWOOD, Circuit Judge, dissenting in part.
I join all Judge Gee’s cogent opinion save for what is, under the
facts of this case, a relatively minor disagreement as to the
employee-claimants’ entitlement to damages. During the period
in which Continental could have continued to operate under its
labor contracts, as indicated in part B1 of the majority opinion, I
would allow the striking employees to recover amounts not ex-
ceeding the difference between the rates and benefits actually
28 eS
ate dD Wah at
A BO bat > eM Dre
17A
paid by Continental during that time and those that would have
been paid had the provisions of the labor contracts been followed.
I agree that this is not a statutory violation or unfair labor prac-
tice act case. I also agree that the strikers were not constructively
discharged. Nevertheless, under basic principles of contract law,
when Continental clearly repudiated its labor contracts by
unilaterally reducing the agreed rates of pay, the employees were
no longer required to tender performance.' As appropriate work
at Continental indisputably continued to be available to the strik-
ing employees, the doctrine of avoidable consequences prevents
their recovery of what they could have thus earned had they not
been on strike. But there is no justification for denying them
recovery for the difference between the revised work rule pay
rates (and benefits) and those of the labor contracts; to do so
simply awards Continental a windfali.
A hypothetical example will illustrate my point. On January 1,
A hires B to perform all of A’s audit work, for as long during the
year as A has need for such, with B’s compensation to be at the
rate of $5,000 a month. Sometime in June, A informs B that, be-
cause A believes good auditors are available at $3,500 a month,
B’s wages for the final half of the year will be only $3,500 a month.
Accordingly, B then accepts, effective July 1, an offer for similar
work from C which pays $4,000 a month for the July 1 to Decem-
ber 31 period, and A promptly hires a replacement for B who
works throughout the same time for $3,500 a month. I would
allow B to recover $6,000 from A. The majority would allow B no
recovery. But if B had rejected C’s offer and had continued.
(without waiving his contract rights) to work for A at the reduced
$3,500 a month level, the majority would presumably allow B to
! [note that the majority does not hold that the strike was illegal. If it were
illegal, that would put the issue in a different context.
18A
recover $9,000 from A, as it allows pre-strike recovery here.? That
seems an unreasonable result which is not consonant with fun-
damental contract law.
I accordingly dissent from so much of the majority opinion as
disallows all recovery for any striking employee during any of the
time he or she was on strike.
? If, in the latter situation, the majority limited B’s recovery to $6,000 (on the
theory that he could have mitigated his otherwise $9,000 damages by accepting
C’s offer), then the majority could not consistently deny B all recovery in the
former situation (where he accepts C’s offer).
APPENDIX B
1B
APPENDIX B
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DISTRICT
U. S. Bankruptcy Court
Southern District of Texas
FILED
SEP 10 1985
OEE
Clerk
8
In re §
§ Case No. 83-04020-H1-5
CONTINENTAL AIR LInEs, INC., § (Chapter 11)
x
Debtor. §
§
§
In re §
§ Case No. 83-04021-H3-5
TEXAS INTERNATIONAL AIRLINES, § (Chapter 11)
INC., §
§
Debtor. § Consolidated Case No.
§ 83-04019-H2-5
8
ORDER GRANTING DEBTORS’ MOTION
FOR PARTIAL SUMMARY JUDGMENT
For the reasons set forth in the findings of fact and conclusions
of law attached hereto, the Debtors’ Motion for Partial Summary -
Judgment disallowing the claims for contract rejection damages
filed by the Air Line Pilots Association, International and the
ee 7 eT
2B |
Union of Flight Attendants on behalf of pilots and flight atten-
dants is hereby granted to the extent such claims include damages
for striking pilots and flight attendants during the period of time
they were on strike. The amount of such disallowance shall be
determined in a hearing at which the identities of striking pilots
and flight attendants and the periods of time they were on strike
will be determined. In the alternative, in the event that the refer-
ence of the Motion for Partial Summary Judgment is withdrawn,
the claims by ALPA and UFA for contract rejection damages on
behalf of striking pilots and flight attendants are hereby estimated
to have zero value. It is so
ORDERED and ADJUDGED this 10th day of September,
1985.
ls/ T. Glover Roberts
UNITED STATES BANKRUPTCY JUDGE
3B
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DISTRICT
U. S. Bankruptcy Court
Southern District of Texas
FILED
SEP 10 1985
2 EE
Clerk
§
In re §
§ Case No. 83-04020-H1-5
CONTINENTAL AIR LINES, INC., § (Chapter 11)
§
Debtor. §
§
§
In re §
§ Case No. 83-04021-H3-5
TEXAS INTERNATIONAL AIRLINES, § (Chapter 11)
INC., §
§
Debtor. § Consolidated Case No.
§ 83-04019-H2-5
§
UNCONTESTED FACTS AND CONCLUSIONS OF
LAW RELATIVE TO DEBTORS’S MOTION FOR
SUMMARY JUDGMENT WITH RESPECT TO
UNCONTESTED FACTS
1. On September 24, 1983, Continental Air Lines, Inc. and
Texas International Airlines, Inc. filed petitions for
4B
reorganization under Chapter 11 of the United States
Bankruptcy Code, 11 U.S.C. § 1101, et seg. Upon filing the
bankruptcy petition, Continental temporarily suspended all
domestic service and on September 27, 1983, Continental began
rebuilding that service by reinstating a limited portion of its
domestic service, initially requiring fewer employees than
immediately prior to bankruptcy. The active employees worked
under “emergency work rules” and were generally paid lower
wages and benefits than they had received before the filing of the
petition. [see cites in paragraph 3-6 below}.
2. In response to Continental’s implementation of the
emergency work rules, the Air Line Pilots Association,
International (“ALPA”) and the Union of Flight Attendants
(“UFA’) called strikes which began October 1, 1983. The ALPA
strike has continued to the present. The UFA strike was
terminated on April 17, 1985 when the union instructed its
members to offer unconditionally to return to work.
3. Continental filed a Motion To Reject its collective
bargaining agreements with ALPA and UFA on September 27,
1983. Following an extended hearing this Court approved
Continental’s motion to reject its collective bargaining
agreements with ALPA (Order of June 19, 1984) and UFA
(Order of December 5, 1984). Each contract rejection is
retroactive to September 24, 1983.
4. This Court has previously found that “had Continental not
made its unilateral changes in pilot pay and work rules, it would
have been unable to continue its operations for very much longer
for want of necessary cash and, because it could not compete
effectively with the low cost carriers in direct competition with it,
it would have continued losing money until it closed its doors.”
SB
Findings of Fact And Conclusions of Law Relating To The
Rejection Of The Collective Bargaining Agreement With ALPA
1 28; see In re Continental Airlines Corp., 38 B.R. 67, 71-72
(Bankr. S.D. Tex. 1984); Memorandum Of Authorities
Authorizing Rejection Of ALPA Collective Bargaining
Agreement at 12-13, 30. The Court also found that “without
substantial concessions from [the UFA] contracts, Continental
would run out of money and go out of business.” Findings of Fact
had Crinctinal ’ Law Relating To the Rejection Of Coliecti
Bargaining Agreements with UFA at 8.
5. This Court has further found that the emergency work
rules applicable to pilots and flight attendants were modeled on
work rules in use at Braniff Airways, Inc. and Southwest Air
Lines, and that a substantial proportion of the unionized
employees at Continental have indicated, by electing to cross the
picket lines, “their willingness to work at the wage levels and
under the working conditions (including increased productivity)
offered by Continental.” Memorandum Of Authorities
Authorizing Rejection Of ALPA Collective Bargaining
Agreements at 47-48; see Findings Of Fact And Conclusions Of
Law Relating To The Rejection Of The Collective Bargaining
Agreement With ALPA at 99 31, 32; Findings Of Fact And
Conclusions Of Law Relating To The Rejection Of Collective
Bargaining Agreements With UFA at 6-7, 10.
6. This Court’s previous findings make clear that the striking
pilots retained their status as employees during the time they were
on strike. See Memorandum of Authorities Authorizing
Rejection Of ALPA Collective Bargaining Agreement at 22,
23-24. This Court has also found that upon filing its petitions for
reorganization, “Continental immediately went on a campaign to
get the remaining pilots to agree to fly under the emergency work
6B
rules,” and that once ALPAs October 1, 1983 strike began,
“Continental maintained a telephone ‘bank’ in which pilots were
called and requested to fly.” Memorandum Of Authorities
Authorizing Rejection Of ALPA Collective Bargaining
Agreements at 22. This Court has further found that Continental
“made a strenuous effort to get striking pilots to return to
service,” and upon “instructions from its chief operating officer,
Continental delayed hiring [replacement] pilots until it felt it had
to do so to service its re-expanding route system.” Id, at 22-23.
7. ALPA and UFA have filed claims in this Court for contract
rejection and other damages on behalf of all pre-petition pilots
and flight attendants, respectively. Continental has sought
summary judgment disallowing the contract rejection damage
claims insofar as they seek to recover backpay and other benefits
for striking employees during the time they were on strike.
8. The unions have asserted in response that their striking
members should not be denied damages because (a) they were
not really on strike at all, but rather were simply withholding their
services (this position was abandoned at oral argument); (b)
federal labor law does not apply to the determination of employee
claims in bankruptcy proceedings; and (c) the changes in wages
and work rules on September 24, 1983, should be treated as
wrongful “constructive” discharges of affected employees.
CONCLUSIONS OF LAW
1. As originally filed on April 30, 1985, Debtors’ Motion
requested this Court to enter summary judgment in Debtors’
favor on the issue of liability for contract rejection damages for
strikers, pursuant to Section 502(b)(1).
i aah aaa teil
pr Oe ee meyer y ery Tee
7B
2. On June 3 and 4, 1985, ALPA and UFA filed motions
pursuant to 28 U.S.C. § 157(d) seeking to withdraw the reference
of this Motion from the Bankruptcy Court on grounds that
Debtors’ Motion “required the consideration of federal laws
regulating interstate commerce,” i.e., the Railway Labor Act, 45
U.S.C. § 151 et seq,, and that withdrawal of the reference was
therefore mandatory. The unions’ motions remain pending in the
District Court.
3. On June 3, 1985, ALPA and UFA, joined by the Official
Union Labor and Pension Creditors’ Committee, filed a Motion
to Stay this Court’s consideration of the present motion pending
District Court disposition of the Section 157(d) Motion to
Withdraw Reference. After hearing, this Court entered an Order
denying the Motion, filed July 8, 1985, which found, inter alia, as
follows:
To interpret Section 157(d) as the unions propose would dis-
rupt the claims procedure so carefully crafted in the
Bankruptcy Code, by bifurcating the claims resolution
process between the District Court and the Bankruptcy
Court. As a practical matter, such a result would be in-
tolerable. Not only would the Bankruptcy Court be abandon-
ing a statutorily-charged responsibility, but it would be
thrusting upon the District Court additional litigation in an
already overcrowded arena, a scenario that is not only costly
and time consuming, but also a ridiculously circuitous route
in the bankruptcy case administration process.
Order filed July 8, 1985 at 4-5.
4. Subsequently, on July 16, 1985, Debtors filed a Motion to
Estimate All Contingent Or Unliquidated Employee Claims For
Purposes Of Confirmation Pursuant To Bankruptcy Code Section
502(c) And To Convert Pending Motions For Summary Judgment
To Motions To Estimate The Value Of Claims. While Debtors’
position denying all liability for such claims had not and has not
changed, Debtors’ proposed procedures changed, according to
the Debtors’ view, only the estimation process could produce
allowance of claims for Plan purposes in a time frame sufficient to
avoid delay in the closing of this case.
5. On June 25, 1985, this Court entered an Order Granting
Debtors’ Motion for Extension of the Exclusivity Period up to
September 5, 1985 upon the express condition that no further
extensions would be granted and that the Debtors would, in fact,
file a proposed Plan of Reorganization on that date.
6. The Court is satisfied that it has jurisdiction to resolve on
the merits the liability issues presented by the present motion, for
the motion does not require direct interpretation or application
of the statutory language of the Railway Labor Act or any other
federal statute regulating interstate commerce. The question
rests squarely in the bankruptcy claims adjudication process.
7. There are on file in this major reorganization proceeding
at least three other § 157(d) motions to withdraw the reference
which have been pending undecided on the crowded docket of
the District Court for this district for over one year. See Motion
Of Union Of Flight Attendants For Withdrawal Of The
Reference Of Debtors’ Motion To Reject Collective Bargaining
Agreement Under The Railway Labor Act, filed September 7th,
1984; Motion Of Air Line Pilots Association For Withdrawal Of
The Reference Of Debtors’ Motion To Reject Collective
Bargaining Agreement Under The Railway Labor Act, filed
August 3, 1984; Motion By International Association Of
9B
Machinists And Aerospace Workers To Withdraw The Reference
To The Bankruptcy Court Of The Debtors’ Motion To Reject
Collective Bargaining Agreements, filed July 20, 1984. The
pendency of the § 157(d) motions and the novel and arcane
nature of the issues arising from this recently enacted provision
could create substantial potential difficulties in the administration
of this bankruptcy case and to the bankruptcy system in general.
In the opinion of this Court, it is for this reason that those courts
which have considered this issue have held that § 157(d) must be
narrowly construed to avoid disrupting the Bankruptcy Court
system constructed by the Bankruptcy Reform Act of 1978.
While this Court has concluded that it has jurisdiction to enter
summary judgment on liability on the present motion, the ques-
tions raised regarding the applicability of § 157(d) to this motion
for summary judgment, as well as the pendency in the District
Court of the unions’ motions to withdraw reference, have the
potential for substantially delaying the closing of this reorganiza-
tion. For this reason, the Court has determined that it will also
estimate the value of the claims subject to this Motion pursuant
to § 502(c) of the Bankruptcy Code. Since estimation is clearly a
“core proceeding” and a function within the jurisdiction of the
Bankruptcy Court, use of the estimation procedure by this Court
will allow the now on file Debtors’ Reorganization Plan to
proceed without unnecessary or cost delay to the Debtor or
creditor groups who may have reached agreement relative to debt
repayment. The estimation procedure can, however, be simplified
by resolution of the summary judgment issues now on file by the
Court’s review of facts previously established in the case and ap-
plication of the appropriate law.
8. Section 502(b)(1), 11 U.S.C. § 502(b)(1), provides that a
claim against an estate in bankruptcy is to be disallowed if such
10B
claim “is unenforceable against the debtor and property of the
debtor, under any agreement or applicable law for a reason other
than because such claim is contingent or unmatured.” The value
of a bankruptcy claim for contract breach must therefore be
determined in precisely the same way that such a claim would be
determined if the bankruptcy had not occurred. In re Nuisance
Corp., 17 Bankr. 80, 82 (Bankr. D.N.J. 1981); 3 Collier on
Bankruptcy 7 502.02, at 502-24 et seq. (15th ed. 1985). A
bankrupt in breach of contract pursuant to 11 U.S.C. § 365(g)
may assert any defense to the liability flowing from statutorily
created breach which any other promisor in breach of contract
may assert. Mazirow vy, Grigsby (In re White Motor Corp,), 44
Bankr. 563 (N.D. Ohio 1984).
9. The Bankruptcy Court must determine the allowability of
claims by applying the appropriate substantive law which would
be applied in the non-bankruptcy context. See, ¢.g., Woods-Tucker
Leasing Corp, v, Hutcheson-Ingram Development Co,, 642 F2d
744, 748 n.8 (Sth Cir. 1981); Vanston Bondholders Protective
Comm, v, Green, 329 U.S. 156, 161 (1946).
10. The rejected contracts were entered into pursuant to the
Railway Labor Act (“RLA’), 45 U.S.C. § 151 et seq,, as expressly
stated at the outset of each contract. A Railway Labor Act
contract, “like the Labor Management Relations Act § 301
contract, is a federal contract and is therefore governed and
enforceable by the federal law, in the federal courts.” [AM v.
Central Airlines, Inc,, 372 U.S. 682, 692 (1963). The Supreme
Court has also held that “the substantive law to apply in suits
under $ 301(a) is federal law, which the courts must fashion from
the policy of our national labor laws.” Textile Workers of America
y, Lincoln Mills of Ala,, 353 U.S. 448, 456 (1957).
11B
11. Under well-established principles of federal labor law,
striking employees are not entitled to back pay for the period of
time they are on strike, even if the strike is in response to an
unlawful unfair labor practice by the employer. See, ¢.g.. Safeway
Trails, Inc., 233 N.L-R.B. 1078, 1083 (1977), enf'd, 641 F.2d 930
(D.C. Cir. 1979), cert, denied, 444 U.S. 1072 (1980); Ace Tank &
Heater Co., 167 N.L.R.B. 663, 664 (1967); Comfort, Inc, 152
N.LR.B. 1074, 1090 (1965), enf’d in part, 365 F.2d 867 (8th Cir.
1966). The basis for this principle that the employee’s voluntary
act of going on strike is an intervening cause of his loss, for which
the employer is not legally answerable because alternative legal
remedies were available to the employee.
An employer is . . . only indirectly responsible for the loss of
employment sutfered by a striker even when the strike has
been precipitated by unfair labor practices. The loss of
employment is attributable to the striker’s own voluntary act
in withholding his services until the unfair labor practices
have been remedied by the strike rather than by available
forms of legal redress. It is for this reason that a striker —
even an unfair labor practice striker ~- unlike a dis-
criminatee, is not entitled to backpay until he has made an
application for reinstatement which has been denied.
For the same reason it would seem that a striker is not en-
: titled to be made whole for the loss of any benefits which he
may have incurred as a result of going out on strike.
=: Cone Bros. Contracting Co., 158 N.LR.B. 186, 197 (1966). These
principles are equally applicable under the Railway Labor Act.
, “ne ; 690
F.2d 838, 847 (11th Cir. 1982), cert, dismissed, 104 S. Ct. 40
12B
(1983); National Airlines, Inc. v. LAM, 416 F2d 998, 1097 (5th Cir.
1969), after remand, 430 F2d 957, 961 (5th Cir. 1970).
12. Application of federal labor law to claims arising under
RLA contracts may not be avoided by labeling a breach of
contract claim as a “wrongful discharge.” Andrews vy, Louisville &
N.R.Co,, 406 U.S. 320, 323-34 (1972); see also Schroeder v. Trans
Woild Airlines, Inc,, 702 F2d 189, 192 (9th Cir. 1983); cf Allis
Chalmers v. Lueck, 105 S. Ct. 1904, 1910-11 (1985). Federal labor
law therefore controls the determination of remedies for breach
of these RLA collective bargaining agreements.
13. The attempt to characterize the changes in pay rates and
work rules on September 24, 1983 as a wrongful “constructive”
discharge fails in any event because none of the prerequisites to
a finding of wrongful constructive discharge can be met. A
constructive discharge is an imputed, rather than an actual,
discharge; it may be imputed by law where an employer acts to
make conditions intolerable with the intent and effect of forcing
the employee to quit. In order to find that the changes in rates of
pay and working conditions implemented on September 24, 1983
constituted a wrongful constructive discharge en masse, a court
would have to conclude (1) that the pilots and flight attendants
actually terminated their employment as a result of those
changes; (2) that Continental acted without business justification
and with anti-union animus in making the changes; (3) that the
changes created by the emergency work rules were intolerable;
and (4) that the changes were in some way unlawful and
“wrongful,” i.e., they must violate a legal duty owed by the
employer to the employee, such as the duty not to discriminate on
the basis of union membership. See NLRB vy. Cable Vision, Inc,
660 F.2d 1 (ist Cir. 1981); LP. Stevens & Co. vy. NLRB, 461 F.2d
490, 494 (4th Cir. 1972); Newspaper Guild of Boston v, Boston
13B
Herald-Traveler Corp, 238 F.2d 471, 472 (1st Cir. 1956);
Guardian Ambulance Serv, 228 N.L.R.B. 1127, 1130 (1977);
Highland Avenue Convalescent Home, Inc, 220 N.L.R.B. 998
(1975).
14. There is no evidence per the previous Findings of the
Court that the events of September 14, 1983 included mass
termination, either actual or constructive of pilots or flight
attendants. The unions do not claim that their members were
actually involuntarily discharged on September 24, 1983, nor do
they claim that the strikers voluntarily terminated their
employment. This Court’s previous finding that Continental
began strenuous efforts to get the pilots to return to work
immediately after filing its bankruptcy petitions further refutes
the constructive discharge claim.
15. Continental did not lack a business justification for the
changes in wages and work rules. This Court has already expressly
found compelling business justifications for Continental's actions,
and has rejected a claim by these unions that Continental acted in
bad faith in implementing new work rules on September 24.
16. The changes in wages, work rules and working conditions
for Continental pilots and flight attendants on September 24,
1983 were not legally “wrongful” because they were approved as
legal and proper by this Court’s June 19, 1984 and December 5,
1984 decisions allowing the rejection of the collective bargaining
agreements with ALPA and UFA, respectively. In accordance
with NLRB vy, Bildisco & Bildisco, 104 S. Ct. 1188 (1984), this
Court held that the changes in wage rates and work rules
implemented by Continental on September 24, 1983 “were
accomplished not by the employer's unilateral action, but rather
by operation of law.” Memorandum of Authorities Authorizing
14B
Rejection of ALPA Collective Bargaining Agreement at 35
(emphasis in original). The Bankruptcy Court also rejected the
unions’ claim that the implementation of wage rates and work
rules that differed substantially from those in the collective
bargaining agreements would violate the status quo provision of
the Railway Labor Act, 45 U.S.C. § 156. See Memorandum Of
Authorities Authorizing Rejection Of ALPA Collective
Bargaining Agreements at 30-31. The Bankruptcy Court held that
“the rationale of the Supreme Court in Bildisco is equally
applicable to the Railway Labor Act and the status quo provisions
of that Act must give way to the realities of bankruptcy.”
Memorandum of Authorities at 37-38. Thus, in accord with the
Supreme Court’s ruling in Bildisco, this Court expressly held that
the rejection of Continental’s labor agreements and the changes
in wages and work rules implemented on September 24, 1983 did
not violate the Railway Labor Act. Memorandum of Authorities
at 38-39.
17. This Court’s prior decisions approving rejection are the
law of this case and as such are binding on the unions, and cannot
be collaterally attacked in this claims proceeding. See Arizona v.
California, 460 U.S. 605, 618 (1983); Messenger v, Anderson, 225
U.S. 436 (1912); White v. Murtha, 377 F2d 428, 431 (Sth Cir.
1967).
18. The contention that the denial of contract rejection
damages to strikers would unlawfully discriminate against them
vis-a-vis non-strikers must also be rejected. “The axiom that an
employer need not remunerate strikers for work not performed
means simply that it is no more discriminatory for an employer to
deny compensation for absence due to strike than to deny it for
any other period of absence.” Kimberly-Clark Corp,, 171
N.L.R.B. 614, 621 (1968). An award of contract rejection
|
:
:
:
j
:
15B
damages to employees striking a bankrupt company would grant
them a windfall not enjoyed by employees striking a solvent
company, a completely anomalous result.
19. The contention that the contract rejection claims of
striking employees are “minor disputes” which must be resolved
through binding arbitration before an adjustment board lacks
merit for two reasons. First, a Bankruptcy Court has not only
jurisdiction, but also responsibility to decide all claims against an
estate. 28 U.S.C. §§ 1334(a), 157(a), (b)(1), (b)(2)(B). A
determination whether to let a particular dispute be decided in
another forum is committed to the Bankruptcy Court’s absolute
discretion. See, ¢.g., Zimmerman y. Continental Air Lines, Inc.,
712 F.2d 55 (3d Cir. 1983), cert. denied, 104 S. Ct. 699 (1984); In
re F&T Contractors, Inc,, 649 F2d 1229 (6th Cir. 1984). Second,
a Bankruptcy Court’s exercise of discretion is to be guided by
whether in the circumstances of a particular case a specialized
tribunal might provide a more efficacious means of resolving a
dispute. See, ¢.g.. Inre Brookhaven Textiles, Inc,, 21 B.R. 204, 207
(Bankr. S.D.N.Y. 1982). The question of strikers’ entitlement to
contract rejection damages is a question of law which presents no
need for either a specialized tribunal or particularized expertise,
inasmuch as the breach of contract is already established and the
sole issue is whether strikers are entitled to damages under
federal labor law. See In. re Muskegon Motor Specialties
Company, 313 F.2d 841, 843 (6th Cir. 1963).
20. This motion presents a pure issue of law — whether
strikers are entitled to damages for lost future wages and fringe
benefits for the time periods in which they withheld their Services
from the Debtors. To decide this motion, this Court need not
decide apy factual issues — such as who precisely was on strike
and when; whether the strikers failed to mitigate damages; how
16B
many employees were on strike; or the total amount by which the
claims would be reduced if the Debtors prevailed on this motion.
21. No affidavits or other admissible evidence have been
offered to establish that there is a genuine dispute as to any
material fact. Because this Court is persuaded that Continental is
entitled to judgment as a matter of law, partial summary judgment
is appropriate and will be granted. See Fed. R. Civ. P. 56(e).
22. For the foregoing reasons, the union claims for contract
rejection damages will be disallowed to the extent they seek
damages for striking employees for any period of time during
which the employees on whose behalf the claims were asserted
were on strike. At an evidentiary hearing to be held on the claims,
the Court can proceed to determine the amount by which the
unions, claims should be reduced due to their strikes against
Continental.
. 23. This Court has previously held, and reaffirms here, that it
does not believe that Continental’s motion for partial summary
judgment presents issues whose resolution requires the
consideration of federal laws regulating activities affecting
interstate commerce within the meaning of 28 U.S.C. § 157(d).
The Court here interprets the phrase “federal Laws” to mean
“federal statutes”. Although Continental’s objections to the
unions’ claims at issue herein can in some respects be said to arise
out of federal labor law, the resolution of Continental’s motion
has not required the interpretation of any federal statute or the
balancing of comoeting federal policies. Recognizing, however,
that the unions have filed motions to withdraw the reference of
Continental’s motion from the Bankruptcy Court, this Court in
the interest of efficiency and economy to the Court as well as the
parties hereby rules in the alternative that the value of the unions’
ES FE Ss
17B
claims for contract rejection damages on behalf of striking
employees for the period of time they were on strike is estimated
pursuant to 11 U.S.C. § 502(c) to be zero.
The above findings and conclusions are hereby made a part of
and incorporated in the attached Order Granting the Motion for
Summary Judgment. It is so
ORDERED and ADJUDGED this 10th day of September,
1985.
is/ T Glover Roberts _
UNITED STATES BANKRUPTCY JUDGE
APPENDIX C
iC
APPENDIX C
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
IN RE:
CONTINENTAL AIRLINES CORPORATION, 83-04019-H2-5
CONTINENTAL AIR LINES, INC. 83-04020-H1-5
Texas INTERNATIONAL AIRLINES, INC., 83-04021-H3-5
TXIA Ho.pincs CorPORATION, 83-04022-H3-5
Consolidated Case
No. 83-04019-H2-5
Debtors
ORDER
For the reasons set forth in the findings of fact and conclusions
of law attached hereto, the motion of Debtors for summary judg-
ment disallowing the Union of Flight Attendants claims for con-
tract rejection damages is hereby granted. In the alternative, such
claims for contract rejection damages are hereby estimated to
~ have zero value. It is
ORDERED AND ADJUDGED this the 8th day of May, 1986.
ls/ T. Glover Roberts
UNITED STATES BANKRUPTCY JUDGE
2C
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
In RE:
CONTINENTAL AIRLINES CORPORATION, 83-04019-H2-5
CONTINENTAL AIR Lines, INc. 83-04020-H1-5
TEXAS INTERNATIONAL AIRLINES, INC., 83-04021-H3-5
TXIA Ho.pincs CorPorRATION, 83-04022-H3-5
Consolidated Case
No. 83-04019-H2-5
Debtors
FINDINGS OF FACT AND CONCLUSIONS
OF LAW WITH RESPECT TO
THE UNION OF FLIGHT ATTENDANTS
CLAIMS FOR CONTRACT REJECTION DAMAGES
The following facts are either stipulated, uncontested or estab-
lished by the evidentiary record in this case in previous matters, of
which the Court takes notice and is considered a proper and ade-
quate basis on which to make these Findings and Conclusions:
FINDINGS OF FACT
1. On September 24, 1983, Continental Airlines, Inc. and
Texas International Airlines, Inc. (hereinafter “Continental”)
filed petitions for reorganization under Chapter 11 of the United
States Bankruptcy Code, 11 U.S.C. § 1101, et seg.
2. Thereafter, Continental filed a motion pursuant to
§ 365(a) of the Bankruptcy Code, 11 U.S.C. § 365(a), to reject (a)
3C
the collective bargaining agreement between Continental and the
Union of Flight Attendants. After an extended evidentiary
hearing, the Court, on December 5, 1984 entered its order
rejecting two collective bargaining agreements between the
Debtors and the Union of Flight Attendants (“UFA’) that had
been in effect on the day Debtors filed their bankruptcy petitions.
Order Allowing Rejection of Collective Bargaining Agreements
(Dec. 5, 1984). On April 30, 1985, UFA filed a proof of claim for
$409, 190,273.00 in contract rejection damages, including
damages for lost future wages and benefits in the amount of
approximately $299, 140,000.
3. By their terms, the UFA contracts were to expire on
October 1, 1983 (as to the Debtors’ DC-9 flight attendants) and
on December 1, 1984 (as to the Debtors’ Boeing 727 and DC-10
flight attendants). The latter contract included provisions which
permitted reopening of the contract prior to the expiration date
in the event of certain government actions regarding deregulation
or the acquisition of new types of aircraft. Debtors take the
position that the Boeing 727 and DC-10 contract was properly
reopened by virtue of a February 4, 1983 letter from Continental
to UFA requesting negotiations under the authority of these
provisions. The DC-9 contract was reopened in August 1983.
4. In its proof of claim, UFA claimed lost future wages and
benefits as contract rejection damages for the period September
24, 1983 through and including May 31, 1986, as to both UFA
contracts. The Union Committee asserts that these employee
claims for damages are the difference between what they would
have earned had they continued to work under the contract and
what they in fact earned.
4C
5. On September 20, 1985, Continental (hereinafter
Debtors) filed a Motion to Estimate the Vale of the UFA Claims
for Contract Rejection Damages at Zero Value and for Summary
Judgment disallowing these claims in their entirety. UFA and the
Union Committee strongly opposes both motions.
6. The UFA contracts relative to the motion here are in
evidence in the record described above of which this Court has
taken notice. These contracts are clear and unambiguous. It
appears that: (a) They do not contain any guarantee of
employment; (b) Each contract contains terms as to the wages
and working conditions which will be provided to employees
covered by the agreements when work is available; and (c) Each
contract provides that, when work is not available, management
may furlough employees, subject to notice of furlough and
furlough pay requirements, which themselves are subject to
exceptions for various contingencies not within management's
control.
7. At the time of the filing of the bankruptcy petitions in this
matter, the Debtors unilaterally modified work rules and reduced
wages and fringe benefits paid to flight attendants represented by
UFA as well as those of pilots and other employees, pending this
Court’s approval of the Debtors’ motion to reject the contracts
under 11 U.S.C. § 365. In re Continental Airlines Corp., 38 Bankr.
67 (Bankr. S.D. Tex. 1984). This Court approved the rejection of
the flight attendant contracts, effective retroactively to
September 24, 1983, in accordance with 11 U.S.C. § 502(g). This
Court has already found that if Debtors had not made changes in
their labor contracts, including specifically the UFA contracts,
within a short time the Debtors would have run out of cash and
gone out of business. Findings of Fact and Conclusion of Law
Relating To The Rejection of Collective Bargaining Agreements
oes Sr See Cot
pote eas 8 | alana
SC
With UFA (December 5, 1984) at 8; Memorandum of Authorities
Authorizing Rejection of Air Line Pilots Association Collective
Bargaining Agreements (August 17, 1984) at 33; Findings of Fact
and Conclusions of Law Relating To The Rejection Of The
Collective Bargaining Agreement With ALPA (August 17, 1984)
at 19 28, 40. :
CONCLUSIONS OF LAW
1. The unions contend that this Court, which rejected the
ALPA and UFA collective bargaining agreements pursuant to the
Bankruptcy Code itself, 11 U.S.C. § 365, now does not have
jurisdiction to liquidate the claim or to estimate the value of any
damages created thereby through the Bankruptzy Code “breach”
of these contracts. 11 U.S.C. § 365(g). This contention is clearly
without merit. Bankruptcy courts have jurisdiction to decide the
allowability of all claims against an estate. 28 U.S.C. §§ 1334(a);
157(a), (b)(1), (b)(2)(B).
2. The Court has jurisdiction to resolve on the merits the
question of liability, if any, and damage claims for contract
rejection presented by the present motion. The motion does not
require direct interpretation or application of the statutory
language of Federal Labor Statute or any other federal statutes
regulating any interstate commerce, and therefore § 152(d) is
inapplicable here. The question rests squarely in the bankruptcy
claims adjudication process. 11 U.S.C. § 502. In re Continental
Air Lines, Inc., Order Granting Debtors’ Motion to Estimate, 57
B.R. 841 (S.D. Tex. 1985).
3. Further, use of the estimation procedure by this Court will
allow the Debtors’ reorganization plan to proceed without
unnecessary or costly delay to the Debtor or other creditor groups
6C
who may have reached agreement relative to debt repayment.
The estimation procedure can, however, be simplified by
resolution of the summary judgment issues now on file by the
Court’s review of undisputed facts and facts previously
established in the case, and application of the appropriate law.
4. The courts have recognized that bankruptcy judges have
discretion to determine the allowability of claims in bankruptcy
even if the claim ordinarily would have been liquidated by another
tribunal. Of course, in the absence of bankruptcy, every claim
would have been resolved in another forum. In Zimmerman _y.
Continental Air Lines, Inc,, 712 F2d 55, 56 (3d Cir. 1983), cert.
denied, 104 S.Ct. 699 (1984), a manufacturing company entered
into a contract with Continental which contained an arbitration
clause. The Arbitration Act, 9 U.S.C. §§ 1-208, “requires a federal
court to stay proceedings pending arbitration if issues pertinent
to the dispute are also the subject of an arbitration agreement
between the parties.” 712 F.2d at 56. Subsequently, the
manufacturing company went into bankruptcy and initiated
adversary proceedings against Continental alleging that
Continental’s claim under the contract was improper. Under the
authority of the Arbitration Act, Continental requested that the
matter be deferred to arbitration.
The bankruptcy court there denied Continental’s request, the
Third Circuit affirmed, and the Supreme Court denied certiorari.
Relying on the policies underlying the 1978 Bankruptcy Reform
Act, the Third Circuit held that the Act impliedly modified the
express provisions of the Arbitration Act. 712 F.2d at 56, 59.
Bankruptcy proceedings, however, have long held a special
place in the federal judicial system. Because of their impor-
tance to the smooth functioning of the nation’s commercial
SEA WORLD Ba me
7C
activities, they are one of the few areas where Congress has
expressly preempted state court jurisdiction. See 28 U.S.C.
§ 1334. While the sanctity of arbitration is a fundamental
federal concern, it cannot be said to occupy a position of
Arbitration Act. Thus while a bankruptcy court would have
the power to stay proceedings pending arbitration, the use of
this power is left to the sound discretion of the Bankruptcy
Court.
712 F.2d at 59-60 (emphasis supplied).
5. Citing Gary Aircraft Corp, v, United States (In re Gary
Aircraft Corp.), 698 F.2d 775 (Sth Cir.), cert. denied, 104 S.Ct. 82
(1983), the unions further argue that bankruptcy courts lack
jurisdiction to disallow claims in disputes that Congress has
committed to a specialized tribunal. The unions’ reliance on Gary
Aircraft is misplaced. Gary merely established that, under the
1898 Act, bankruptcy courts ordinarily should defer to the Armed
Services Board of Contract Appeals (“ASBCA’”) for the
liquidation of claims arising from government defense contracts.
(The Gary case factually originated with Gary filing a claim under
its contract against the government, with the government filing a
counter claim.) The case does not provide that bankruptcy courts
have no “jurisdiction” over such claims. Moreover, the Fifth
Circuit based its decision on its findings that deferral would not
impair the satisfaction of other bankruptcy claims and that
government contracts are extremely complex, technical and
esoteric, 698 F.2d at 782, not on the proposition that every claim
’
8C
in bankruptcy which otherwise would have been decided by a
“specialized tribunal” should be liquidated by that tribunal.
To the contrary, the Fifth Circuit expressly acknowledged that,
where bankruptcy court estimation or liquidation by the ASBCA
would unduly delay the administration of the estate, the
bankruptcy court retains the power under the 1898 Act to disal-
low the claim in its entirety. 698 F.2d at 784 n.7. Under the 1978
Bankruptcy code, which applies to this proceeding, the authority
of a bankruptcy court to estimate the value of unliquidated claims
is, if anything, even stronger, since new 11 U.S.C. § 502(c) re-
quires the court to estimate the value of unliquidated claims
where liquidation would unduly delay reorganization.! The 1978
Act significantly expanded bankruptcy subject matter jurisdiction:
[The 1978 Act] evidenced a strong Congressional or federal
policy in favor of the newly created bankruptcy court having
jurisdiction which is sufficiently broad to promptly and ex-
peditiously hear and determine all cor.troversies invulving
matters of law, equity and even admiralty.
"See Addison v. Langston (In re Brints Cotton Marketing, Inc.), 737 F.2d
1338, 1340-41 (Sth Cir. 1984); In re Curtis, 40 Bankr. 793, 801 n.7 (W.D. La.
1984); In re Nova Real Estate Investment Trust, 23 Bankr. 62, 65 (Bankr. E.D.
Va. 1982); In re Brada Miller Freight Systems, Inc., 8 Bankr. 62 (Bankr. N.D. Ala.
1980); 3 Collier on Bankruptcy 4 502.03 at 502-74, 75 (15th ed. 1985).
Accordingly, even if this Court did not have jurisdiction to disallow the claim, it is
clear that the Court nevertheless would have jurisdiction to estimate the value of
the contract rejection claims. Order Granting Debtors’ Motion to Estimate All
Contingent Unliquidated Employee Claims For Purposes of Chapter 11
Confirmation Pursuant to Section 502(c) of the Bankruptcy Code (Sept. 26,
1985). Thus, for example, courts may estimate the value of claims asserted on
behalf of employees by the NLRB, without deferring to any NLRB administrative
process, which might otherwise apply. In re Unit Parts Co., 9 Bankr. 386 (W.D.
Okl. 1981) (court rejects the same arguments and authorities presented by the
unions here, refusing to defer to NLRB, noting that these authorities predate the
1978 expansion of bankruptcy court jurisdiction).
9C
i 9 Bankr. 408, 410 (Bankr. W.D. Va.
1981); see Zimmerman vy, Continental Airlines, Inc., supra, 712
F.2d at 56.
6. In addition, the Debtors’ motion for summary judgment
and estimation in this claims proceeding presents a very different
case for bankruptcy court resolution of the issues than was
present in Gary. First, unlike Gary, the time necessary to
complete arbitration of the unions’ multi-million dollar contract
rejection claims could seriously impair the claims and interests of
the substantial body of other creditors who have already settled
with the debtors and now await distribution. As pointed out in
another case, in Gary, “the only asset of the bankrupt’s estate. ..
consisted of a. . . contractual claim against the United States
government.” In re Compton Corp., 40 Bankr. 880, 884 (Bankr.
N.D. Tex. 1984). Where resolution of a claim could “affect the
amount, existence and priority of claims to be paid out of the
general funds, and, thus involve the interest of other creditors,”
courts have held that a bankruptcy judge does not abuse his
discretion in refusing to compel arbitration of such a claim. Inre
F&T Contractors, Inc,, 649 F.2d 1229, 1232 (6th Cir. 1981); see
Johnson v England, 356 F.2d 44, 51-52 (9th Cir.), cert. denied, 384
U.S. 961 (1966). Moreover, since “[p]rotection, of general
creditors is a major function of . . . bankruptcy proceedings,”
submission of the union claims to arbitration would be
particularly unsound because Continental’s creditors have not
consented to arbitration and would have no right to participate in
the arbitration process. 649 F.2d at 1233 n.1; 356 F.2d at 52.”
2 In 4. dition, in arbitration there would be no right to discovery, arbitrators
are less likely to follow legal standards than courts, and judicial review would be
limited. See Zimmerman, Cross and Johnson. supra.
GOUT MARI PS ae aa
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Second, unlike the ASBCA in Gary, RLA arbitration panels
(system boards of adjustment) are not specialized tribunals with
particular expertise in the specific issues of fact that must be
resolved in order to value the claim as it relates to this proceeding.
If presented to a system board, bankruptcy contract rejection
claims would be decided by arbitrators who would not necessarily
be more familiar with the particular contract language or past
practice of the parties than is this Court, and who may, like this
Court, have to take evidence and hear testimony in order to
resolve any actual issues of fact, if any exist. Unlike the Court,
however, the arbitrators would have no cognizance of the reor-
ganization or the interests of other creditors. Particularly, in these
circumstances, deferral to arbitration is not required. See In re
Amalgamated Foods, Inc,, 41 Bankr. 616, 617, 619 (Bankr. C.D.
Cal. 1984) (debtor need not submit ERISA claims to arbitration
since bankruptcy claims process adequate to resolve claims).
Third, Gary was decided under the 1898 Act. Bankruptcy courts
which have considered Gary generally have found it inap-
propriate to defer claims to another forum in cases under the
1978 Code. For example, in Amalgamated Foods, the court
refused to defer a claim under the Employee Retirement Income
Security Act (“ERISA”) to arbitration even though the statute
contains a mandatory arbitration procedure. Distinguishing Gary
and Nathanson v. NLRB, 344 U.S. 25 (1952), the court rejected
the creditor’s contention that the claim required expertise not
possessed by the court. 41 Bankr. at 618-619. Comparing the
bankruptcy claims process under the 1978 Bankruptcy Reform
Act to ERISA'’s statutory arbitration procedure, the court con-
cluded that both procedures furthered the policy of speedy dis-
position.
a ed Ae kB i | ge Aa Me A iodme Be ORR) Be) DD A Be A Bi ii i te
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I find that the bankruptcy claims procedure achieves the goal
sought by ERISA arbitration —indeed, that the claims pro-
cedure may serve that goal better than ERISA arbitration
itself. For that reason, I hold that the debtor may bypass ar-
bitration in favor of the claims procedure.
41 Bankr. at 616-617. See also In re Page-Wilson Corp., 37 Bankr.
527, 529 (Bankr. D. Conn. 1984); Inre Compton Corp., supra, 40
Bankr. at 884.
These cases are undoubtedly correct, since the Bankruptcy
Reform Act of 1978:
[Significantly expands the jurisdiction of the bankruptcy
courts and is based on the notion that to protect the positions
of both the bankrupt and its creditors, bankruptcy actions
should not be subject to unnecessary delay and all claims and
issues relevant to such action should be resolved in one ¢x-
iti i
Zimmerman v, Continental Air Lines, supra, 712 F.2d at 56 (em-
phasis supplied).°
7. Finally, and most conclusively, as UFA itself points out in
its opposition, at 6, in NLRB v. Bildisco & Bildisco, 104 S. Ct. 1188
(1984), the Supreme Court said that claims for damages arising
out of the bankruptcy court’s own rejection of a collective
> The Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub. L.
No. 98-353, did not detract from bankruptcy court subject matter jurisdiction, but
merely allocated the exercise of that jurisdiction between the bankrupicy and
district courts. 28 U.S.C. § 1334; 1 Collier on Bankruptcy 1 3.01 at 3-19 to 3-29
(15th ed. 1985); Carlton v. BAWW, Inc., 751 F.2d 781 (Sth Cir. 1985).
—_—---—— —--—— -—-
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bargaining agreement must be adjudicated in the bankruptcy
court.
[Cjlaims arising after filing, such as result from the rejection
of an executory contract, must also be presented through the
normal administration process by which claims are estimated
and classified. See 11 U.S.C. § 502 (g); Inre Hoe & Co., Inc.,
508 F.2d 1126, 1132 (2d Cir. 1974); Workman vy. Harrison,
282 F.2d 693, 699 (10th Cir. 1960). Thus, suit may not be
brought against the debtor-inpossession under the collective
bargaining agreement; recovery may be had only through ad-
ministration of the claim in bankruptcy.
104 S. Ct. at 1198-99 (emphasis supplied). Thus, Gary presents no
obstacle to the resolution of this Court of the Claims issues, and
the unions’ jurisdictional objections are totally without merit.
8. Although the rejection of an executory contract
constitutes a breach of that contract, 11 U.S.C. § 365(g), Section
502(b)(1) of the Bankruptcy Code, i1 U.S.C. § 502(b)(1),
provides that a claim against an estate in bankruptcy is to be
disallowed if such claim “is unenforceable against the debtor and
property of the debtor, under any agreement or applicable law for
a reason other than because such claim is contingent or
unmatured.” The legal standards for measuring the value of a
bankruptcy claim for contract breach are therefore the same as
those which would be applied if the bankruptcy had not occurred.
In re Nuisance Corp., 17 Bankr. 80, 82 (Bankr. D.N.J. 1981); 3
Collier on Bankruptcy 9 502.02 at 502-24 et seq. (15th ed. 1985).
A bankrupt in breach of contract pursuant to 11 U.S.C. § 365 may
assert any defense to the liability flowing from the statutorily
created breach which any other promisor in breach of contract
od
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may assert. Mazirow v, Grigsby (In re White Motor Corp.}, 44
Bankr. 563 (N.D. Ohio 1984).
9. The Court must therefore determine the allowability of
these claims by applying the appropriate substantive law which
would have been applied in the non-bankruptcy context. Sec, ¢.g.,
Co., 642 F2d 744, 748 n.8 (Sth Cir. 1981); Yanston Bondholders
Protective Committee v, Green, 329 U.S. 156, 161 (1946).
10. The rejected contracts were entered into pursuant to the
Railway Labor Act, 45 U.S.C. §§ 151, et seg., as expressly stated
at the outset of each contract. A Railway Labor Act contract,
“like the Labor-Management Relations Act § 301 contract, is a
federal contract and is therefore governed and enforceable by
federal law, in the federal courts.” [AM y, Central Airlines, Inc.
372 US. 682, 692 (1963). The Supreme Court has also held that
“the substantive law to apply in suits under § 301(a) is federal law,
which the courts must fashion from the policy of our national
labor laws.” Textile Workers of America v. Lincoln Mills of
Alabama, 353 U.S. 448, 456 (1957). Although the Debtors are
subject to the Railway Labor Act, the federal courts have often
looked to decisions interpreting the National Labor Relations
Act, including § 301 of the LMRA amendments to that Act, for
guidance in RLA matters. See generally Trainmen v, Jacksonville
Terminal Co., 394 U.S. 369, 383 (1969) (although NLRA cannot
be imported wholesale into the railway labor area, NLRA case
law provides “the most relevant corpus of national labor policy”);
irli 538 F.2d 46 (2d Cir. 1976) (using
NLRA Supreme Court decisions to delineate scope of mandatory
subjects of bargaining under the RLA).
*
a”
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11. Asa matter of federal labor case law, employees subject to
a collective bargaining agreement are not entitied to lost future
wages as damages under such an agreement when the employer
ceases operations, unless the agreement guarantees future
employment. See, ¢.g., LL_Case v, NLRB, 321 U.S. 332 (1943);
Fraser v, Magic Chef-Food Giant Markets, Inc, 324 F2d 853 (6th
Cir. 1963); American Bakery & Confectionery Workers v, Great
Atlantic & Pacific Tea Co,, 357 F Supp. 1322 (WD. Pa. 1973),
aff'd mem., 491 E2d 748 (3d Cir. 1974); Abbington v. Dayton
Malleable, Inc,, 561 F Supp. 1290 (S.D. Ohio 1983), aff'd mem.,
738 F.2d 438 (6th Cir. 1984); Union de Trabajadores v, Helio San
Jeronimo Corp,, 434 F. Supp. 643 (D.P.R. 1977); Hotel &
Restaurant Employees Alliance, Local 237 v, Alleghney Hotel
Co,, 374 F Supp. 1259 (W.D. Pa. 1974). As noted above, the
contracts at issue did not guarantee employment, but only
provided the terms and conditions applicable to available work.
The presence of contract provisions which permitted
management to furlough employees appears to confirm that by
their own terms these contracts were on their face not guarantees
of employment.
12. As a matter of federal labor case law »nder both the
NLRA and the RLA, and as a matter of the common law of
contracts in general, no promisee is entitled to more than nominal
damages for breach of contract unless that promisee can
demonstrate actual injury proximately caused by the breach.
IBEW vy. A-] Electrical Services, 535 F2d 1, 3 (10th Cir.) cert.
denied, 429 U.S. 832 (1976); Brotherhood of R.R. Trainmen v,
Denver & R.G.WR. Co,, 338 F.2d 407 (10th Cir. 1964), cert.
denied, 380 U.S. 972 (1965); Restatement (Second) of Contracts
$§ 346-347.
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13. As noted above, but for the rejection of the collective
bargaining agreements, the Debtors would have ceased
operations and flight attendants would have had no cognizable
claims for lost future wages because the rejected contracts did not
obligate the Debtors to provide employment, but rather only
established rates of pay and working conditions for any
employment which was available. Federal labor law does not
require an award of damages for time periods during which no
work would have been available in any event, even where an
employee was discharged in violation of the NLRA. See NLRB v,
Biscayne Television Corp., 337 F.2d 267, 268 (Sth Cir. 1964);
Nabors v. NLRB, 323 F.2d 686, 690 (5th Cir. 1964); Midland Ross,
Inc, 239 N.L.R.B. 1205 (1979), order enf’d, 653 F.2d 239 (6th Cir.
1981); NLRB v, United Contractors, Inc,, 614 F.2d 134, 138 (7th
Cir. 1980); NLRB v, Columbia Tribune Publishing Co,, 495 F.2d
1384, 1393 (8th Cir. 1974); NLRB vy, American Creosoting Co.,
139 F2d 193 (6th Cir. 1943); Brown & Root, Inc, 112 N.L-R.B.
295 (1955); Lauren Burt, Inc. of Colorado, 114 N.L.R.B 295
(1955); Hill Transportation Co,, 102 N.L.R.B. 1015 (1953). Under
the facts of this case, but for the Court’s rejection of the collective
bargaining agreements at issue here, the Debtors would have
gone out of business and flight attendants represented by UFA
could not have claimed lost future wages as damages, because the
agreements did not guarantee future employment.
14. Even if UFA’s claim for damages are meritorious, UFA
damage calculations are flawed. The amount of damages to be
awarded for breach of a collective bargaining agreement is limited
by both the termination date of the agreement at issue and by the
application of 11 U.S.C. § 502(b)(7). The termination date of the
contract establishes the ending date for damage calculation
purposes.
16C
The fact that the contract which was breached was due to
expire April 30, 1976, is controlling as to the period for which
damages may be awarded. Nothing in that contract could
have created an expectation that the employees would have
continued to enjoy the same wages and benefits beyond the
expiration of the contract.
IBTv. Standard Brands 579 F.2d 1282, 1295 (Sth Cir. 1978), cert.
denied, 443 U.S. 913 (1979). Accord, UAW v, Roblin Industries,
561 F Supp. 288, 298 (W.D. Mich. 1983) (rights under agreements
can extend beyond expiration date only if agreement so provides);
Sun Oil Co, of Pa. v. NLRB, 576 F2d 553, 558 (3d Cir. 1978);
Baker v, Fleet Maintenance, Inc,, 409 F2d 551, 554 (7th Cir.
1969); In. re Vic Snyder, Inc,, 23 Bankr. 185 (E.D. Pa. 1982). As
previously noted, the UFA contracts expired by their own terms
on October 1, 1983 (as to DC-9 flight attendants) and December
1, 1984 (as to Boeing 727 and DC-10 flight attendants). UFA‘s use
of May 31, 1986 as the ending date for both contracts in its cal-
culations is based upon its assertions regarding the “average”
length of negotiations in the airline industry. These assertions,
however, are unsupported by any requisite evidence or ap-
propriate pleading and have not been shown by UFA to bear any
relationship here to the “average” length of negotiations at Con-
tinental and Texas International Airlines, as the UFA’s own wit-
nesses admitted in depositions regarding their calculations.
Deposition of C. Lampe at 30-31 (Aug. 14, 1985); Deposition of
C. Winkler at 32-33 (Aug. 14, 1985). This is the only evidence
before this Court. It appears uncontradicted and was offered by
the Debtors. The assertions, the Court concludes, bear no
relationship at all to what, in fact, would have happened to Con-
tinental, which was not in “average” financial condition, if the
contracts had not been rejected.
RE OO FE ES Le ee
17C .
15. Continental’s obligation, under the Railway Labor Act, to
maintain the “status quo” after the contracts expired is excused by
the Bankruptcy Code. NLRB v, Bildisco & Bildisco, 104 S. Ct.
1188 (1984) (despite statutory obligation to maintain wages and
working conditions provided for in collective bargaining
agreement, Chapter 11 debtors may unilaterally lower wages
prior to order rejecting the agreement); Memorandum of
Authorities Authorizing Rejection of Air Line Pilots Association
on Collective Bargaining Agreements (August 17, 1984) at 30-40.
16. An addition to the restriction on damages created by the
term of the contract, Section 502(b)(7), 11 U.S.C. § 502(b)(7),
further limits damages for breach of “employment contracts” to a
maximum of one year’s compensation. Collective bargaining
agreements are “employment contracts” within the meaning of 11
U.S.C. § 502(b)(7). In-re Cortland Container Corp., 30 Bankr.
715 (Bankr. N.D. Ohio 1983).
17. UFA’s reliance on the Report of the Commission on the
Bankruptcy Laws of the United States, H.R. Doc. No. 93-137
(1973), to argue that Section 502(b)(7) does not apply to
collective bargaining agreements is patently unpersuasive. In that
Report, a commission (not the U.S. Congress) described a
provision similar to what became Section 502(b)(7) as
“principally” (not exclusively) intended to apply to long-term
management contracts, and to the termination of contracts for
future “athletic, entertainment or other services.” The language
under discussion itself indicates that the commission did not
intend the cap provision to apply only to such contracts.
Moreover, the report in question is not part of the legislative
but is a report of a
national commission on bankruptcy which concluded its
proceedings five years before the 1978 Code was enacted. As
18C
enacted, § 502(b)(7) contains no limitation to “management,”
“entertainment” or “sports” contracts. The legislative history of
the 1978 Code reflects only an intention to track a similar
provision on leases, which had placed a cap on the damages which
might be claimed for the rejection of a lease to prevent unjust
enrichment of a lessor. H.R. Rep. No. 95-595, 95th Cong., ist
Sess. 352-354 (1977); S. Rep. No. 95-989, 95th Cong., 2d Sess.
62-65 (1978).
18. No affidavits or other admissable evidence have been
offered to establish that there is a genuine dispute as to material
fact. Because this Court is persuaded that Continental is entitled
to judgment as a matter of law, summary judgment is appropriate
and will be granted. Federal Rules of Civil Procedure 56(e).
19. For the foregoing reasons, the Union of Flight Attendant’s
claim for contract rejections damages will be disallowed in its
entirety.
20. This Court further rules that the value of UFAss claim for
contract rejection damages, pursuant to its proof of claim, is
estimated, pursuant to 11 U.S.C. § 502(c) to be zero based upon
the Court’s conclusion that these claims are ultimately without
merit.
The Court would note that even if the damages for breach of
the collective bargaining agreements were deemed appropriate,
UFAs contract rejection damages claims would be limited to the
lesser of one year’s compensation or the compensation due under
the contracts from September 24, 1983 to the date that the:con-
tract was no longer effective by its own terms. In the case of the
DC-9 contract, damages would thus be limited to compensation
for the period September 24, 1983 to October 1, 1983, the
19C
specified expiration date. In the case of the Boeing 727 and DC-
10 contract, damages could be no greater than one year’s compen-
sation as provided in the Bankruptcy Code, Section 502(b)(7).
These Findings of Fact and Conclusions of Law are hereby in-
corporated in and made a part of the order attached hereto. It is
sO
“4
ORDERED AND ADJUDGED this 8th day of May, 1986.
si T. Glover Roberts _
UNITED STATES BANKRUPTCY J UDGE
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.