AN UNHAPPY CROSSROADS: THE INTERPLAY OF BANKRUPTCY AND AIRLINE LABOR LAW

American Bar Association Section on Labor & Employment Law

Railroad & Airline Labor Law Committee

August, 2005

John J. Gallagher Jon A. Geier Margaret H. Spurlin Paul, Hastings, Janofsky & Walker LLP 875 15th Street, NW Washington, DC 20005 202-551-1700

TABLE OF CONTENTS

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I. INTRODUCTION ................................................................................................. 1

II. REJECTION OF COLLECTIVE BARGAINING AGREEMENTS .................... 2

A. Adoption of § 1113 .................................................................................... 2

B. Procedural Requirements of § 1113........................................................... 2

C. Standards for Rejection.............................................................................. 3

D. Burden of Proof.......................................................................................... 9

E. Section 1113(f)......................................................................................... 10

F. Application of § 1113 After Contract Expiration Date............................ 10

III. EMERGENCY RELIEF: INTERIM CHANGES .............................................. 12

A. Subsection 1113(e) Authorizes Interim Changes With Prior Judicial Approval ..................................................................................... 12

B. Relief under 1113(e) may be granted before filing of 1113 petition ....... 13

C. Duration of Interim Changes ................................................................... 14

D. Standard for Approval of Interim Changes.............................................. 15

E. Appealability of interim order permitting emergency relief under 1113(e) ..................................................................................................... 21

F. Change in Relief Granted Under 1113(e) ................................................ 21

G. Conditions Attached to Order Granting Interim Relief ........................... 21

IV. CONSEQUENCES OF REJECTION OR INTERIM CHANGE........................ 22

A. Scope of Debtor’s Right to Change Terms Following Contract Rejection .................................................................................................. 22

B. Strikes and Injunctions............................................................................. 22

C. Claims Arising Out of Labor Contract Rejection .................................... 23

D. Claims Resulting from Interim Changes Under § 1113(e) ...................... 24

V. LABOR CREDITORS AND LABOR CLAIMS ................................................ 25

A. Creditors Committee................................................................................ 25

B. Prepetition Employee Claims .................................................................. 25

C. Postpetition Employee Claims................................................................. 25

D. “Superpriority” of Labor Contract Claims in the Absence of Rejection Under § 1113 ........................................................................... 26

VI. NEW ISSUES PRESENTED BY “BANKRUPTCY PROTECTION” AGREEMENTS AND EQUITY ALLOCATION AGREEMENTS .................. 27

TABLE OF CONTENTS (continued)

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A. Equity Allocation Agreements................................................................. 28

B. “Protection” Against Section 1113 Motions............................................ 29

VII. LITIGATION WITH THE DEBTOR ................................................................. 30

A. The Automatic Stay ................................................................................. 30

B. Police Power Exception ........................................................................... 30

C. Arbitration Under Labor Contracts.......................................................... 30

D. Removal ................................................................................................... 31

E. “Core” and “Noncore” Proceedings......................................................... 31

F. Estimation ................................................................................................ 31

VIII. MODIFYING RETIREE BENEFIT PLANS UNDER 11 U.S.C. §1114............ 31

A. Scope........................................................................................................ 31

B. Retiree Benefits Plans Do Not Include Pension Plans............................. 32

C. Reachback Provision................................................................................ 32

D. Protected Persons ..................................................................................... 32

E. Application of Section 1114 Where Benefits Never Contractually Guaranteed ............................................................................................... 32

F. Procedural Steps to Authorize Modification............................................ 33

G. Role of Unions and Retiree Committees ................................................. 35

H. Court-Ordered Modification .................................................................... 35

I. Interim Modification................................................................................ 37

AN UNHAPPY CROSSROADS: THE INTERPLAY OF BANKRUPTCY AND AIRLINE LABOR LAW

by

John J. Gallagher

Jon A. Geier Margaret H. Spurlin

Paul, Hastings, Janofsky & Walker LLP

I. INTRODUCTION

Under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 1101 et seq., airlines are subject to the same bankruptcy reorganization procedures as other businesses. The size and complexity of the airline business, however, typically make an airline bankruptcy an exceptionally large and often protracted proceeding. On labor issues, airlines are subject to Section 1113 of the Bankruptcy Code, 11 U.S.C. § 1113, which allows a Debtor to secure the bankruptcy court’s approval for the interim and/or permanent rejection of collective bargaining agreements (“CBA”).1 Bankruptcy courts, however, are often unfamiliar with even the most basic concepts of labor law, to say nothing of the more arcane features of the Railway Labor Act (“RLA”). The focus of this paper is the interplay of the Bankruptcy Code, especially Section 1113, with an air carrier’s statutory and contractual obligations under the Railway Labor Act.

In Chapter 11 proceedings, the carrier continues to operate its business, albeit as a new entity – the Debtor-in-Possession – which is subject to the protections of the Bankruptcy Code and the supervision of the Bankruptcy Court. The purpose of a Chapter 11 Reorganization is the re-structuring of the Debtor’s business and financial obligations so that the Debtor’s business becomes viable, i.e. profitable, for the long term future, thereby generating profits which will help to compensate creditors for some or all of their losses resulting from the bankruptcy. While in Chapter 11 proceedings, the Debtor is expected to conduct its business in the ordinary course and to manage its affairs 1 Section 1113 does not apply to railroads. Instead, Section 1167, 11 U.S.C. § 1167, provides that railroad collective bargaining agreements may not be changed by a bankruptcy court or trustee. Thus, a railroad would be obligated to follow the procedures of the Railway Labor Act (“RLA”) before altering the terms of a CBA. Railroad bankruptcies and reorganizations frequently have been facilitated by special legislation that supplements or supplants the Bankruptcy Code, and deals with labor issues. See Regional Rail Reorganization Act of 1973, Pub. L. No. 93-236, 87 Stat. 985 (1973) (codified as amended at 45 U.S.C. § 701 et. seq. (1988)); Rock Island Railroad Transition and Employee Assistance Act, Pub. L. No. 96-254, 94 Stat. 399 (1980); Milwaukee Railroad Restructuring Act, Pub. L. No. 96-101, 93 Stat. 736 (1979).

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in order to maximize the value of the estate and the likely proceeds to creditors. All extraordinary business decisions require prior approval from the Court. All of the Debtor’s financial obligations are categorized as (1) pre-petition or post-petition; and (2) secured or unsecured. The Code sets a scheme of priorities for ultimate payment of such claims, in whole or in part, from the assets of the estate under a Plan of Reorganization.

Contract rejection under Section 1113 is discussed in detail in Section II. Section III details the provisions of Section 1113(e) for judicial approval of interim changes to labor contracts. Section IV describes the consequences of contract rejection or interim modification, including the scope of permitted changes, strikes and injunctions, and claims resulting from rejection or modification. Labor claims, and the Bankruptcy Court’s heavy reliance on the Official Creditors’ Committee(s), are discussed in Section V. Section VI describes the so-called “Bankruptcy Protection” letters and equity allocation agreed to by US Airways and United Airlines with their unions during their Section 1113 negotiations, and a similar letter agreed to by American Airlines in its near-bankruptcy labor negotiations in the Spring of 2003. The protections of the Bankruptcy Code include an automatic stay of all claims and litigation against the Debtor, which is discussed in Section VII. Section VIII discusses Section 1114, which provides for the modification of retiree non-pension benefits.

II. REJECTION OF COLLECTIVE BARGAINING AGREEMENTS

A. Adoption of § 1113. Prior to the adoption of § 1113 in 1984, rejection of CBAs (except those of railroads), was governed by § 365 of the Bankruptcy Code, which permits unilateral rejection of any executory contracts of the Debtor, subject only to a minimal “business judgment” or “benefit to the estate” test. In NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1984), the Supreme Court ruled (1) that a CBA could be rejected if it burdened the estate, and if the equities balanced in favor of rejection after reasonable efforts to negotiate a voluntary modification had been made and were not likely to produce a solution; and (2) that it was not a labor law violation (an unfair labor practice) for an employer unilaterally to abrogate a collective bargaining agreement after filing for bankruptcy but before the court approved rejection. Section 1113 was quickly adopted in 1984 to overturn Bildisco and to prohibit changes in labor contracts in bankruptcy without bankruptcy court approval. After the adoption of § 1113, a Debtor can modify or reject a CBA only pursuant to order of the bankruptcy court.

B. Procedural Requirements of § 1113. Five procedural steps must be satisfied before the application to reject can be granted:

1. After filing the Chapter 11 petition but before filing an application to reject, the Debtor must make a proposal to the union which provides for modifications of the collective bargaining agreement which are necessary to permit reorganization and treat all parties fairly and equitably. § 1113(b)(1)(A).

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2. The Debtor must provide the union with such relevant information as is necessary to evaluate the proposal. § 1113(b)(1)(B).

3. Once the proposal has been made, up until the time of the rejection hearing, the Debtor must meet at reasonable times with the union and confer in good faith in an attempt to reach mutually satisfactory modifications to the agreement. § 1113(b)(2).

4. After the application has been filed, the bankruptcy court must schedule a hearing within fourteen days. A seven day extension is possible in the interest of justice, and further extension is possible if all parties agree. § 1113(d)(1).

5. The court must make a ruling within thirty days of the first date of the hearing. An extension is permissible if the parties agree; otherwise, the Debtor may suspend the contract pending the court’s ruling. § 1113(d)(2).

UFCAW Local 211 v. Family Snacks, Inc., 257 B.R. 884, 896 (8th Cir. BAP. 2001) (“there is nothing in the language of § 1113 that dictates when an application to reject must be made”).

C. Standards for Rejection. Once the above “procedural” steps are satisfied, the statute establishes three express criteria for the court’s decision on rejection:

1. The employer has made the proposal for modification and it meets the requirements detailed above; and

2. The union has refused to accept the proposal without “good cause”; and

3. The balance of equities clearly favors rejection. § 1113(c)(1),(2),(3).

One recent case indicates that it is important for the debtor to make the best case it can on its motion to reject, because if the debtor’s motion to reject is denied, the debtor cannot come back a second time and renew its motion based on subsequent proposals. In re Fulton Bellows & Components, Inc., 301 B.R. 723 (E.D. Tenn. 2003) (second motion barred by res judicata; to hold otherwise would create a disincentive for the debtor to negotiate in good faith). While this rationale strikes us as questionable, the case does illustrate the risks created by the uncertainties surrounding Section 1113.

A number of courts have reduced § 1113 to nine requirements, summarized below. In re American Provision Co., 44 B.R. 907, 909 (Bankr. D. Minn. 1984); Truck Drivers Local 807 v. Carey Transp., Inc, 816 F.2d 82 (2d Cir. 1987); Wheeling- Pittsburgh Steel v. United Steelworkers, 791 F.2d 1074, 1080 (3d Cir. 1986).

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1. Proposal to Union. The Debtor must make a proposal to the union to modify the CBA.

2. Information to Union. The most complete and reliable information available must underpin the Debtor’s proposal. See In re Liberty Cab & Limousine Co., 194 B.R. 770 (Bankr. E.D. Pa. 1996) (not approving rejection because, inter alia, Debtor did not provide most important financial information to union prior to hearing)

3. Necessary Modifications. The proposed modifications must be necessary to permit the reorganization of the Debtor. The Third Circuit has held that the new proposed terms must be “essential” to prevent the Debtor’s liquidation in the short term. Wheeling-Pittsburgh, 791 F.2d at 1086-87 (3d Cir. 1986). Most other courts have a more relaxed standard, that the modifications must be “necessary” in the sense that they will increase the feasibility of reorganization. Carey v. Truck Drivers Local 807., 816 F.2d at 89-90 (2d Cir. 1987); In re Mile Hi Metal Systems, 899 F.2d 887, 892-93 (10th Cir. 1990). The Carey court evaluated this factor as follows:

record evidence indicates that Carey was losing large sums of money, that its Local 807 labor costs (in contrast to other employees’ salaries and benefits) were well above industry averages, and that Carey lacked sufficient assets to meet its current expenses. This well-documented testimony from Carey officials supports the court’s finding that Carey had good faith reasons for seeking modifications in its Local 807 agreements. Moreover, record evidence also supports the view that Carey needed to upgrade its facilities and its vehicles in order to complete reorganization successfully. Therefore the bankruptcy court’s conclusion that Carey needed to obtain modifications of the magnitude requested, and not merely break-even cost reductions as Local 807 argues, is not clearly erroneous.

Some courts have not allowed contract rejection where the Debtor’s proposed modification includes terms that are non-economic in nature, such as departure from union security clauses, grievance procedures, seniority or job classification provisions. In re Mile Hi Metal Systems, 899 F.2d at 892; In re Valley Kitchens, 52 B.R. 493 (Bankr. S.D. Ohio 1985); In re Express Freight Lines, Inc., 119 B.R. 1006 (Bankr. E.D. Wis. 1990) (proposed modification of grievance procedure not necessary). Courts differ as to whether inclusion of non-economic proposals is fatal to rejection. Compare In re Sun Glo Coal Co., Inc., 144 B.R. 58, 63 (Bankr. E.D. Ky. 1992); In re William P. Brogna Co., Inc., 64 B.R. 390, 392 (Bankr. E.D. Pa. 1986); with In re Hoffman Brothers Packing Co., 173 B.R. 177, 182-83 (9th Cir. BAP 1994) (not fatal); In re Bowen Enterprises, Inc., 196 B.R. 754 (Bankr. W.D. Pa. 1996) (inclusion of many non-economic proposals designed

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to “clean up” the contract not fatal because every such proposed modification to which union objected eventually was withdrawn).

Some courts reason that each change need not be evaluated by itself in judging necessity – rather, it is the labor saving embodied in the package as a whole that is significant. Compare In re Royal Composing Room, 848 F.2d 345 (2d Cir. 1988), cert. denied, 489 U.S. 1078 (1989) (each proposed change need not be evaluated on its own -- employer proposes package with total cost savings and it is up to union to bargain for any changes that would be less intrusive on employee rights yet still yield savings); with In re Mile Hi Metal Systems, 899 F.2d at 892 n.8 (noting view that each proposed modification must be necessary to reorganization).

Section 1113 applies even in a case where the Debtor will not be engaged in business because it is selling its assets as a going concern, but does not apply where the Debtor is simply liquidating. See In re Maxwell Newspapers, Inc., 981 F.2d at 91 ("§ 1113 applied to this transaction because what is to emerge, if the sale is consummated, is the Daily News reorganized as an ongoing business.”); UFCW Local 211 v. Family Snacks, Inc., 257 B.R. 884 (8th Cir. BAP 2001) (allowing application of § 1113 even after Debtor sold all its assets); In re Hoffman Bros. Packing, 173 B.R. at 186-87 (“The distinction between reorganization of a Debtor and the sale of a going concern asset to a third party [is] irrelevant to considerations under § 1113, based on Chapter 11’s goal of continuing the enterprise,”); In re United States Truck Co. Holdings, 165 L.R.R.M. (BNA) 2521 (Bankr. E.D. Mich 2000) (“necessity” requirement of 1113 not met where Debtor was liquidating, not selling assets as going concern); In re The Lady H Coal Co., 193 B.R. 233, 240-43 (Bankr. S.D.W.Va. 1996) (denying a Debtor’s application for rejection on equitable grounds but assuming that rejection may occur to facilitate a sale), In re Ionosphere Clubs, Inc., 134 B.R. 515, 517 (Bankr. S.D.N.Y. 1991) (discussing problematic application of § 1114’s “necessary to permit the reorganization of the Debtor” language to liquidating Chapter 11 cases).

4. All Parties Treated Fairly. The proposed modifications must assure that all creditors, the Debtor and all of the affected parties are treated fairly and equitably. The courts look more favorably on contract rejection when all employee groups bear their share of wage reductions. Carey, 816 F.2d at 90-91. In re Royal Composing Room, 62 B.R. 403 (Bankr. S.D.N.Y. 1986), aff’d, 848 F.2d 345 (2d Cir. 1988), cert. denied, 489 U.S. 1078 (1989). They also consider whether concessions have been made by suppliers, secured creditors, state and local taxing agencies, and management and nonunion employees. In re K&B Mounting, 50 B.R. 460, 464 and 468 (all parties treated equally where nonunion workers made equivalent concessions, there was a huge backlog of accounts payable owed to creditors, and principals offered to retire, resulting in large savings); In re Bowen Enterprises, Inc., 196 B.R. 734 (Bankr. W.D. Pa. 1996) (rejection allowed because burdens spread equitably over all affected parties; fairness did not require that unions be treated identically with other parties). The Carey court stated:

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The Debtor is not required to prove, in all instances, that managers and non-union employees will have their salaries and benefits cut to the same degree that union workers’ benefits are to be reduced. To be sure, such a showing would assure the court that these affected parties are being asked to shoulder a proportionate share of the burden, but we decline to hold that this showing must be made in every case.

Rather, a Debtor can rely on proof that managers and non-union employees are assuming increased responsibilities as a result of staff reductions without receiving commensurate salary increases; this is surely a sacrifice for these individuals. Particularly where, as here, the court finds that only the employees covered by the pertinent bargaining agreements are receiving pay and benefits above industry standards, it is not unfair or inequitable to exempt the other employees from pay and benefit reductions. . . .

The lower court also correctly looked to pre-petition concessions obtained from the mechanics’ union and two of Carey’s principal creditors . . . as proof that these parties were contributing fairly and equitably to the effort to keep Carey afloat. Because a section 1113 application will almost always be filed before an overall reorganization plan can be prepared, the Debtor cannot be expected to identify future alterations in its debt structure.

816 F.2d at 90-91. See also Teamsters v. IML Freight, 789 F.2d 1460 (10th Cir. 1986) (lower court’s approval of rejection reversed because it failed to make specific factual findings as to the Debtor's salary expense compared with the cost of the union employees’ wages and benefits); In re Jefley, Inc., 219 B.R. 88 (Bankr. E.D. Pa. 1998) (not approving rejection because Debtor did not propose sufficient reduction in creditors’ or principals’ remuneration); In re National Forge Co., 289 B.R. 803 (Bankr. W.D. Pa. 2003) (allowing rejection despite large severance payments to top executives, approved by bankruptcy court to ensure that executives would remain with the Debtor through bankruptcy).

The absence of a “snap-back” may bear upon the question whether a proposal is fair and equitable: if the Debtor should do better than projected, creditors and shareholders would receive the benefit of the excess cash, but employees would be stuck with their concessions. Wheeling-Pittsburgh, 791 F.2d at 1091-93 (rejection not allowed, largely because no snap-back); but see In re Walway Co., 69 B.R. 967, 974 (Bankr. E.D. Mich. 1987); In re Appletree Markets, Inc., 155 B.R. 431 (S.D. Tex. 1993) (rejection

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permitted, even though proposed modifications did not contain reduction in management compensation or a “snap-back,” because Debtor’s proposal brought both management and nonmanagement employees in line with competition); UAW v. Gatke Corporation, 151 B.R. 211 (N.D. Ind. 1991) (absence of snap back did not prevent rejection because of Debtor’s poor economic circumstances); Bowen Enterprises, Inc. v. United Food and Commercial Workers, 196 B.R. 734 (Bankr. W.D. Pa. 1996) (absence of snap back not fatal; union should have included it in counter proposals, if union deemed it essential).

5. Information to Union. While requirement two deals with information on which the proposal is based, requirement five requires the Debtor to provide the union such relevant information as is necessary to evaluate the proposal. American Provision, 44 Bankr. at 909 n.2; In re Fiber Glass Industries, Inc., 49 B.R. 202, 206-07 (Bankr. N.D.N.Y. 1985) (Debtor failed to disclose anticipated lay off of one-third of union workers); In re Allied Delivery, 49 B.R. 700, 703 (Bankr. N.D. Ohio 1985) (where the Debtor provided the union with the previous year’s financial statements, the burden shifted to the union to show why more specific information or information going back several years was necessary).

6. Meet at Reasonable Times. Between the time of the making of the proposal and the time of the hearing on rejection, the Debtor must meet at reasonable times with the union. In re Maxwell Newspapers, Inc., 981 F.2d 85 (2d Cir. 1992) (10 hours sufficient); In re Century Brass Products, 55 B.R. 712, 716 (Bankr. D. Conn. 1985), rev’d on other grounds, 795 F.2d 265 (2d Cir. 1986), cert. denied, 479 U.S. 949 (1986) (not inherently unreasonable that Debtor filed for rejection only 4 days after it presented proposed modifications); In re Kentucky Truck Sales, 52 B.R. 797, 801 (Bankr. W.D. Ky. 1985) (four meetings sufficient); Allied Delivery, 49 B.R. at 701-03 (two); see also Amherst Sparkle Market, 75 B.R. 847, 850 (Bankr. N.D. Ohio 1987) (two); American Provision, 44 B.R. at 911 (requirement not met where only one meeting, and Debtor did not avail itself of union’s willingness to discuss further).

7. Confer in Good Faith. At the meetings the Debtor must confer in good faith in attempting to reach mutually satisfactory modifications of the CBA. . In re Horsehead Indus., 300 B.R. 573, 588 (Bankr. S.D. N.Y. 2003 (Debtors devoted their attention to two of the union locals where the bulk of the union members worked, and declined requests to meet with the third local; court permitted rejection for the two and denied rejection for the third where employer did not negotiate in good faith). Several commentators have opined that the bargaining requirements of section 1113(b)(2), while similar to the concept of good faith bargaining under the NLRA, are not intended to incorporate labor law principles into bankruptcy court proceedings. See Mark S. Pulliam, Richard A. Conn, Jr. & Jed W. Brickner, Collier Labor Law and the Bankruptcy Code, ¶ 3.04[2][b][i] at 3-56 (1993) (collecting authorities). Nonetheless, the courts use similar criteria; for example, a “take it or leave it” proposal is not evidence of good faith. In re S.A. Mechanical, Inc., 51 B.R. 130 (Bankr. D. Ariz. 1985); In re American Provision Co., 44 B.R. 907 (D. Minn. 1984) (debtor failed to confer in good faith where only one

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meeting in which Union rejected proposal but indicated willingness to negotiate further, but debtor did not pursue further discussion). On the other hand, the requirement is satisfied when the Debtor has seriously attempted to negotiate reasonable modifications in the existing agreement prior to the rejection hearing. Kentucky Truck Sales, 52 B.R. at 801-02. If the Debtor does not confer in good faith, rejection will not be permitted, regardless of whether the union also acted in bad faith. In re GCI, Inc., 131 B.R. 685, 695 (Bankr. N.D. Ind. 1991).

8. Union Must Have Refused to Accept the Proposal Without Good Cause. In re Salt Creek Freightways, 47 B.R. 835 (Bankr. D. Wyo. 1985), established that the union will not have good cause to reject a proposed modification simply because the proposal is not in the employees’ best interest and the union cannot in principle agree to it. The “good cause” requirement must be viewed narrowly in light of the main purpose of Chapter 11 to facilitate reorganization. In In re Maxwell Newspapers, 981 F.2d 85 (2d Cir. 1992), the Second Circuit upheld the bankruptcy court’s finding that the union lacked good cause for rejecting the Debtor’s proposal, even though the Debtor permitted the union only 10 hours to respond. It stated:

good cause serves as an incentive to the Debtor trying to have its labor contract modified to propose in good faith only those changes necessary to its successful reorganization, while protecting it from the union's refusal to accept the changes without a good reason. To that end, the entire thrust of § 1113 is to ensure that well-informed and good faith negotiations occur in the market place, not as part of the judicial process. Reorganization procedures are designed to encourage such a negotiated voluntary modification. See Joseph L. Cosetti & Stanley A. Kirshenbaum, Rejecting Collective Bargaining Agreements Under Section 1113 of the Bankruptcy Code – Judicial Precision or Economic Reality?, 26 Duq. L. Rev. 181, 221 (1987). Knowing that it cannot turn down an employer's proposal without good cause gives the union an incentive to compromise on modifications of the collective bargaining agreement, so as to prevent its complete rejection.

Royal Composing Room, 848 F.2d at 349 (where the union makes compromise proposals during the negotiating process that meet its needs while preserving the Debtor’s savings, its rejection of the Debtor’s proposal would be with good cause). See also Horsehead Indus., 300 B.R. 573, 587-88 (union does not demonstrate good cause where union submitted a proposal for ratification that does not have support of union members, or where union insisted on participation of potential purchaser in negotiations); In re Sierra Steel, 88 B.R. 337, 340 (Bankr. D. Colo. 1988) (good cause not found in potential adverse consequences for other CBAs at other employers). Union “stonewalling” –

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refusing substantively to discuss the Debtor’s proposal and simply hoping that the court will find it did not meet the other requirements of 1113 -- is “unacceptable and inconsistent with Congressional intent.” Carey, 816 F.2d at 92 citing Royal Composing Room. This good cause requirement was “‘intended to ensure that a continuing process of good faith negotiations will take place before court involvement.’” Id. (quoting remarks by Representative Morrison). “Thus, even though the Debtor retains the ultimate burden of persuading the court that the union lacked good cause for refusing proposed modifications, the union must come forward with evidence of ‘its reason for declining to accept the Debtor’s proposal in whole or in part. If prehearing, a union has assigned no reason for its refusal to accept a Debtor’s proposal, it has perforce refused to accept the proposal without good cause under Code § 1113(c)(2).’” Id. Moreover, “[a] union’s presentation of a counter-offer that its members do not support [and have already rejected pre-petition] does not satisfy the good cause requirement.” In re Bowen Enterprises, Inc., 196 B.R. 734 (Bankr. W.D. Pa. 1996) (union did not establish it had rejected the company’s proposal for good cause where its counterproposals and cost analysis were unrealistic and a sham).

9. The Balance of Equities Must Clearly Favor Rejection. Whether the balance of equities clearly favors rejection of the bargaining agreement is the statutory codification of the standard for rejection set forth in Bildisco. Kentucky Truck Sales, 52 B.R. at 805; see also Amherst Sparkle Market, 75 B.R. at 848 (§ 1113 codifies an endorsed equitable standard for rejection which emanated from Bildisco). The standard is higher that the business judgment rule; it involves balancing the interests of the affected parties. Bildisco, 465 U.S. at 526-27. The Supreme Court held that the bankruptcy court must focus on the ultimate goal of Chapter 11 which is successful reorganization. Id. at 527.

The Second Circuit set forth six equitable considerations for determining when the balance of equities favors rejection. Carey v. Truck Drivers Local 807, 816 F.2d at 93. Those are: 1) the likelihood and consequences of liquidation if rejection was not permitted; 2) the likely reduction in the value of creditor’s claims if the bargaining agreement remained in force; 3) the likelihood and consequences of a strike if the bargaining agreement was voided; 4) the possibility and likely effect of any employee claims for breach of contract if rejection was approved; 5) the cost-spreading abilities for the various parties, taking into account the number of employees covered by the bargaining agreement and how various employees’ wages and benefits compared to those of others in the industry; and 6) the good or bad faith of the parties in dealing with the Debtor’s financial dilemma.

D. Burden of Proof. The Debtor bears the burden of persuasion by the preponderance of evidence that it has met the standards for contract rejection. As a practical matter, however, once the Debtor has established its compliance with the various factors, the burden shifts to the union to show the Debtor did not supply information or bargain in good faith, and that the union had good cause to refuse the

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Debtor’s proposal. In re Mile Hi Metal Systems, 899 F.2d at 891-92; In re Blue Diamond Coal Co. 131 B.R. 633, 643 (Bankr. E.D. Tenn. 1991) ("the burden of going forward with the evidence can, however, shift to the union, particularly with respect to test[] number[s] 5, 7, and 8."). With the exception of factor nine of the test, Debtor has the burden of proof by a preponderance of the evidence that all requirements for rejection have been met. However, inclusion of the word “clearly” in § 1113( c)(3), as is reflected in factor nine, indicates that “a higher standard of proof” than the preponderance of evidence standard applies to this particular requirement. In re Walway, 69 B.R. 972, 975 & n.18 (Bankr. E.D. Mich. 1987). Thus, Debtor has the burden of proving factor nine by a “higher” standard than preponderance of the evidence. In re US Truck Co. Holdings, 165 L.R.R.M. (BNA) 2521 (Bankr. E.D. Mich. 2000).

E. Section 1113(f). Subsection (f) provides that the debtor shall not “unilaterally terminate or alter any provisions of a collective bargaining agreement prior to compliance with the provisions of this section.” Subsection (f) may affect priority of employee claims, as discussed in Section VI.D. below, and also has been cited in various cases relating to rejection.

a. Unilateral Changes Before Rejection May Impact Motion to Reject. One court has taken the position that a motion to reject cannot be granted where a debtor made unilateral changes to the agreement, in violation of 1113(f), which provides that a CBA remains in effect until rejected. Birmingham Musicians’ Protective Ass’n Local 256-733 v. Alabama Symphony Ass’n, 211 B.R. 65, 70 (N.D. Ala. 1996). But see In re Electrical Contracting Services Co., 2003 Bankr. LEXIS 1805) (Bankr. D. Colo. 2003) (1113(f) should be taken into account in assessing debtor’s good faith but “Court . . . retain[s] flexibility and discretion needed to fairly and equitably deal with circumstances . . . . A single wrong move in exigent circumstances should not necessarily be fatal to a reorganization effort.”)

b. International bankruptcies. When Air Canada filed for Bankruptcy in Canada, its U. S. operating subsidiary filed a parallel proceeding in New York under the. U.S. Bankruptcy Code. A union representing U.S.-based employees of Air Canada asserted that Section 1113(f) required that the U.S. employees continue to receive step increases provided in their CBA (governed by the Railway Labor Act). In re Ernst & Young, Monitor of Air Canada, no. 03-11971 (Bankr. S.D. N.Y. 2003). The union argued that under Section 1113(f) Air Canada could not unilaterally stop applying the CBA, because the carrier had not even attempted to reject its CBA under § 1113. The U.S. court, citing the comity provision of the U.S Bankruptcy Code (11 U.S.C. § 304), refused to enforce Section 1113(f), and directed the U.S. union to petition the Canadian Bankruptcy Court for relief.

F. Application of § 1113 After Contract Expiration Date. It has not been resolved whether § 1113 applies once a Railway Labor Act CBA has expired (or has passed its amendable date) but its terms are being held in place by the status quo

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provisions of the RLA. As discussed below, there could be a different result under the RLA and NLRA.

NLRA Analogy. Under the NLRA, the majority of courts have ruled that § 1113 applies only where there is an existing CBA -- the Fourth Circuit, Ninth Circuit Bankruptcy Appeals Panel, and four Bankruptcy Court decisions find “nothing to reject” after a contract has expired by its terms. On the other hand, an earlier Ninth Circuit Bankruptcy Appeals Panel concluded that § 1113 could apply even if a contract had terminated, to the extent its terms continued to be held in place due to the employer’s duty to bargain to impasse before making any changes. Compare In re Hoffman Bros. Packing Co., 173 B.R. 177, 184 (9th Cir. BAP 1994) (in case where union gave notice to amend contract, not to terminate it, section 1113 can apply: even if union had properly given notice to “terminate” contract; court states: “The terms of a [collective bargaining agreement] status quo ante continue in effect until an impasse has been reached because the LMRA so mandates. Until such impasse, the agreement continues ‘in effect’ as recognized by § 1113(e), and it is implicit in § 1113(c), since the basic purpose of § 1113 is meant to grant ultimate jurisdiction to the bankruptcy court to accept, modify, or otherwise alter or terminate the status quo ante rights and obligations between a Debtor employer and its employees, whether they are established under a currently existing [collective bargaining agreement ] or pursuant to the LMRA”); with San Rafael Baking Co. v. Northern Cal. Bakery Drivers Sec. Fund, 219 B.R. 860 (9th Cir. BAP 1998) (since CBA expired, no basis for an administrative expense award; “§ 1113 does not allow the bankruptcy court to impose non-contractual obligations on a chapter 11 debtor”; distinguishing Hoffman as entailing an executory, rather than an expired, contract); Gloria Mfg. Corp. v. ILGWU, 734 F.2d 1020, 1022 (4th Cir. 1984) (pre-1113: "Once a contract has expired on its own terms, there is nothing left for the trustee to reject or assume"); In re Chas. P. Young Co., 111 B.R. 410 (Bankr. S.D. N.Y. 1990) (“Rejection of a collective bargaining agreement pursuant to § 1113( b) and (c) is a moot issue if the agreement expires by its own terms and before the bankruptcy court has a hearing on rejection.”); In re Pesce Baking Co., 43 B.R. 949, 957 (Bankr. N.D. Ohio 1984) ("Although a collective bargaining agreement may be executory on the date the debtor's bankruptcy petition is filed, once the agreement expires of its own terms, the debtor's application to reject it becomes moot."); In re Sullivan Motor Delivery, Inc., 56 B.R. 28 (Bankr.E.D.Wis. 1985) (§ 1113 does not apply to CBA that expires prior to bankruptcy filing); Cf. In re CF & I Fabricators, 163 B.R. 858, appeal dismissed, 169 B.R. 984 (Bankr. D. Utah 1994) (because labor agreement containing retiree benefits had expired, Debtor did not impermissibly alter those benefits without complying with § 1114 procedures, which parallel those of § 1113 for rejection of retiree benefits).

Potential Different Result Under RLA. The NLRA has no comparable express status quo provisions to RLA § 2, Seventh and § 6– there is an implied “status quo” under the NLRA only to the extent that NLRA employers must bargain to impasse before making changes. Indeed, some courts under the RLA have reasoned that airline contracts that pass their amendable date have not “expired” at all. Compare Trans World

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Airlines v. IFFA, 809 F.2d 483, 490 (8th Cir. 1987), aff’d without op. by equally divided court, 485 U.S. 175 (1988) (duration clause created an amendable contract, not one that “’terminate[s] either automatically or upon service of notice of a limited number of intended changes.’”); and EEOC v. United Air Lines, Inc., 755 F.2d 94, 97 (7th Cir. 1985) (“The end of the cooling-off period does not terminate the collective bargaining agreement any more than the formal expiration date in the agreement does; it just allows the employer to make the changes proposed in the section 6 notice.”); with IAM v. Reeve Aleutian Airways, Inc., 469 F.2d 990 (9th Cir. 1972), cert. denied, 411 U.S. 982 (1973) (airline CBA terminated by terms of duration clause once § 6 notice was served).

Interim Changes Continue After Contract Expiration. See Chas P. Young, supra, 111 B.R. at 415 (“bankruptcy policy should override labor policy. If the order authorizing interim relief becomes ineffective once the agreement terminates by its own terms, it seems that pursuant to labor law the debtor is required to return to the terms of the original agreement until bargaining to an impasse occurs. Since any interim relief allowed must be ‘essential . . . .’ a return to the original terms of the agreement may very well prove to be detrimental to any possibility of the debtor's successful reorganization.”); In re D.O. & W Coal Co., 93 Bankr. 454, 455 (Bankr. W.D. Va. 1988) (orders issued by the court modifying CBA remain in effect after agreement has expired)

III. EMERGENCY RELIEF: INTERIM CHANGES

A. Subsection 1113(e) Authorizes Interim Changes With Prior Judicial Approval. Subsection 1113(e) establishes separate emergency procedures and criteria for judicial approval of interim changes in a labor contract prior to rejection. It provides:

(e) If during a period when the collective bargaining agreement continues in effect, and if essential to the continuation of the Debtor’s business, or in order to avoid irreparable damage to the estate, the court, after notice and a hearing, may authorize the trustee to implement interim changes in the terms, conditions, wages, benefits, or work rules provided by the collective bargaining agreement. Any hearing under this paragraph shall be scheduled in accordance with the needs of the trustee. The implementation of such interim changes shall not render the application for rejection moot.

No deviation from labor contract terms is allowed until the Debtor secures court approval under either 1113 or 1113(e):

[I]nclusion of the emergency modification provision in § 1113(e) would be meaningless if Congress intended the Debtor to be able to breach an agreement with impunity, still able to petition successfully to reject it later. There is

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no reason to enact an emergency provision if the law allows the Debtor to stop performing its obligations under the contract prior to court intervention. The inclusion of the emergency modification provision is strong evidence that Congress envisioned no possibility of self-help modifications prior to the bankruptcy court’s consideration of the petition to reject the contract.

In re Alabama Symphony Ass’n, 211 B.R. 65 , 154 LRRM 2910 (N.D. Ala 1996) (disallowing rejection because Debtor failed to perform obligations under CBA even prior to filing Chapter 11). In In re Hoffman Bros. Packing Co., 173 B.R. 177 (9th Cir. BAP 1994), the court affirmed prospective reduction under §1113(e) of health and pension benefit costs by two thirds, but overturned the bankruptcy court’s nunc pro tunc reduction back to date of filing.

A motion for emergency relief under Section 1113(e) is scheduled according to the needs of the Debtor. § 1113(e). Even though the union receives only short notice, due process concerns are satisfied. In re United Press Int’l, Inc., 26 C.B.C.2d 813 (Bankr. S.D.N.Y. 1991).

B. Relief under 1113(e) may be granted before filing of 1113 petition.

• Beckley Coal Mining Co. v. United Mine Workers , 98 Bankr. 690 (D. Del. 1988) held that a pending rejection application was not a prerequisite to § 1113(e) relief, stating that such a reading of the subsection would deprive the bankruptcy court of “sufficient flexibility to provide the Debtor in possession temporary economic relief . . . to preserve the business, if possible, for the benefit of all.” 98 Bankr. at 694. The court pointed out the procedural hurdles that must be crossed before an application for rejection may be filed, and expressed concern that if § 1113(e) relief is conditioned on the filing of an application, it may not be available in just the sort of emergency situation for which the subsection was intended.

• In In re Salt Creek Freightways, 46 B.R. at 348, the Debtor in possession did not file an application seeking rejection of the collective bargaining agreement. The union argued that when subsection (e) specified granting interim relief during “a period” when the collective bargaining agreement was in effect, it limited the availability of interim relief “only to the period following an unsuccessful attempt of rejection.” Id. at 349-50. The court stated that “the plain language of the statute does not contain such limitation. Nothing in the context of the use of the word ‘a’

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indicates that it is intended to mean something more specific that [sic] any one of the various times in which a collective bargaining agreement remains in effect.” Id. at 350-51. The court rejected the union’s position and decided that there were no prerequisites to when a Debtor in Possession could apply for interim relief.

• In In re Evans Products Co., the Debtor in Possession both filed for Chapter 11 protection and moved under subsection (e) for interim relief on October 15, 1985. The court heard arguments on the matter on November 14, 1985. The Debtor did not initiate an application for rejection. The court granted the Debtor relief under subsection (e) noting that subsection (e) was designed “to provide temporary economic relief for a Debtor in reorganization under the precise circumstances present here.”

• But see In re Ionosphere Club, 139 B.R. 772, 780-81 (S.D.N.Y. 1992), disagreeing with the above cases, where the bankruptcy court granted lengthy interim relief without considering immediate necessity: “without deciding whether § 1113(e) relief should ever be available prior to the filing of an application for permanent relief, the Court concludes that under the circumstances of this case, the granting of interim relief in the absence of an application for permanent relief was not warranted. Moreover, the structure of the section, the legislative history and the statements of the Court of Appeals strongly suggest that interim relief granted pursuant to § 1113(e) should be of limited duration.”

C. Duration of Interim Changes. While most courts suggest that interim changes should be of limited duration, in some cases such changes have continued indefinitely. Changes are intended to be temporary. The Debtor is still obligated to bargain in good faith towards modification or rejection. In re Durastone Flexicore Corp, 159 B.R. 102 (Bankr. D. R.I. 1993) (only interim modifications are authorized under 1113(e) and a Debtor may not seek permanent extension of interim modifications under section 1113(c); only rejection is permitted under 11139c)); In re Ionosphere Clubs, Inc., 139 Bankr. 772, 780-81 (S.D.N.Y. 1992) (relief under § 1113(e) must be temporary in nature); In re United Press Int’l, Inc., 134 Bankr. 507, 514 (Bankr. S.D.N.Y. 1991) (“short term requirements for the Debtor’s immediate survival”); In re Garofalo’s Finer Foods, Inc., 117 Bankr. 363, 374 (Bankr. N.D. Ill. 1990) (“interim” relief imposed under § 1113 for approximately one month); In re Russell Transfer, Inc., 48 B.R. 241, 244 (Bankr. W.D. Va. 1985) (“temporary measure”). As the Second Circuit stated in dicta in Local 807 v. Carey, 816 F.2d 82, 89-90 (2d Cir. 1987) (emphasis added):

the Wheeling-Pittsburgh court did not adequately consider the significant differences between interim relief requests

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and post-petition modification proposals. Interim relief is available only until the hearing process is completed – normally within two months, see § 1113(d)(1),(2) – and only upon a showing that adherence to the agreement during that time could imperil “continuation of the Debtor’s business” or cause “irreparable damage to the estate.” Id. § 1113(e).

Nonetheless, some courts have granted interim relief for a period of far longer than two months, sometimes granting repeated extensions. E.g., Landmark Hotel & Casino, Inc., 78 B.R. 575 (9th Cir. BAP 1987) (ordering interim relief for six months, later extended four more months); In re Almacs, Inc., 169 B.R. 279 (Bankr. D. R.I. 1994) (original $1113(e) order extended and modified over period of a year; lessening wage reduction, since some modification of CBA remained necessary to prevent liquidation but Debtor’s cash position had improved significantly since original wage reduction).

D. Standard for Approval of Interim Changes. Interim changes may be permitted if they are shown to be either:

1. essential to continuation of the Debtor’s business; or

2. needed to avoid irreparable damage to the estate.

§ 1113(e). In re United Press International, Inc., 134 B.R. 507 (Bankr. S.D. N.Y. 1991) (“There is a difference between the continuation of the Debtor’s business and irreparable damage to the estate. The § 1113(e) evidentiary standards are in the disjunctive . . . . Therefore, a Debtor need only meet one of the statutory standards without having met the other. . . . The term ‘essential’ . . . refers to interim relief that should be limited to the bare minimum, short term requirements for the Debtor’s immediate survival. . . . This view was received favorably, albeit in dicta by Carey, supra, 816 F.2d at 89. . . . [T]he ‘essential’ changes . . . must be measured against whether a Debtor will collapse without the change.”); Landmark Hotel & Casino, Inc., 78 B.R. 575 (9th Cir. BAP 1987) (“In the interim relief context, the court focuses on the ‘bare minimum requirements for short-term survival,’ which is different from the ‘necessary’ changes that will enable the Debtor to complete the reorganization process successfully if the contracts were fully rejected.”); In re Salt Creek Freightways, 46 B.R. 347, 349-50 (Bankr. D. Wyo. 1985) (same; company would be unable to continue in business more than one week without interim changes).

In Beckley Coal Mining Co. v. United Mine Workers , 98 Bankr. 690 (D. Del. 1988), the court compared the requirements of § 1113(c) with the different requirements of 1113(e):

The Third Circuit has stated that the “focus for the ultimate issue of the Debtor’s application for rejection is different” than the focus for determining the applicability of interim

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relief under subsection (e). Wheeling-Pittsburgh Steel, 791 F.2d at 1085; see also In re Salt Creek Freightways, 46 B.R. at 350 (“the standard for the rejection of collective bargaining agreements is separate and distinct from the standard for the authorization of interim changes under subsection (e).”) The Third Circuit has stated that a court may grant interim relief under subsection (e) when, following a hearing, it finds that “an interim change is ‘essential to the continuation of the Debtor’s business, or in order to avoid irreparable damage to the estate.’” Wheeling-Pittsburgh Steel, 791 F.2d at 1085, citing section 1113(e). Consequently, this Court holds that subsection (c) does not apply to determine whether interim relief should be granted under subsection (e). Rather, the Bankruptcy Court, in deciding whether to grant relief under section 1113(e), should determine after a hearing whether the relief is “essential to the continuation of the Debtor’s business or in order to avoid irreparable damage to the estate.”

Accord United Food and Commercial Workers Union, Local 328 v. Almac’s, Inc., 90 F.3d 1, 5, 6 (1st Cir. 1996) (differentiating between the standard for interim changes in § 1113(e) and rejection in § 1113(b) and pointing out that the latter involves substantive “modifications proposed with a view to the long-run success of the Debtor’s business”; “The scope of ‘interim changes’ [in § 1113(e) which speaks of ‘essential to the continuation of the Debtor’s business’] is more limited than the modifications ‘necessary for reorganization.’”). In Truck Drivers Local 807, IBT v. Carey Transportation Inc., 816 F.2d at 89, the Second Circuit compared the standard for interim relief vis-à-vis rejection:

In the interim relief context . . . it is only proper that the court focus on the bare minimum requirements for short-term survival. Royal Composing Room, 62 Bankr. at 417-18. In making the decision whether to permit the Debtor to reject its bargaining agreement, however, the court must consider whether rejection would increase the likelihood of successful reorganization. A final reorganization plan, in turn, can be confirmed only if the court determines that neither liquidation nor a need for further reorganization is likely to follow. Id. at 417 (quoting Bankr. Code § 1129(a)(11). Thus, in virtually every case, it becomes impossible to weigh necessity as to reorganization without looking into the Debtor’s ultimate future and estimating what the Debtor needs to attain financial health. As the

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Royal Composing Room court phrased it, “A Debtor can live on water alone for a short time but over the long haul it needs food to sustain itself and retain its vigor.” Id. at 418.

Interim changes approved:

• In re Aloha Air Group, No. 04-03063 (Bankr. D. Haw. Order March 8, 2005). After all unions other than IAM reached consensual agreements calling for 10% wage reductions, and IAM tentative agreement failed ratification, court imposed 10% reduction on IAM through 1113(e). Aloha said agreement with DIP financier was contingent on having ratified cost-saving agreements with all labor groups.

• In re UAL Corp., No. 02-B-48191 (Bankr. N.D. Ill Order Jan. 31, 2005) After all other unions except AMFA-represented mechanics accepted a second round of cuts, and mechanics failed to ratify their agreement containing parallel cuts, court approved temporary modifications including a 9.8% wage cut, sick pay at 75% of full time rate during first 15 days)

• In re UAL Corp., No. 02-B-48191 (Bankr. N.D. Ill Order Jan. 10, 2003). When all unions except the Machinists had entered into voluntary interim relief agreements, court granted the debtor’s Motion under Section 1113(e) to impose upon the Machinists a 14% reduction for the same time period.

• In re US Airways, Inc., No. 04-13819 (Bankr. E.D. Va. Order Oct. 15, 2004). For all employee groups, modifications ordered for a four-month period, including 21% pay reductions, reductions in defined contribution pension plans, suspension of minimum aircraft requirements, authority to outsource certain work, and work rule changes; court concluded that immediate accumulation of cash was necessary to meet debt and lease payments due early in 2005.

• In re Bowen Enterprises, Inc., 196 B.R. 734 (Bankr. W.D. Pa. 1996). Reduction of wages according to a schedule, redefinition of overtime, elimination of personal days and New Year’s Day as holiday, reduction in paid vacation, provided that shareholders received no dividends during period of reductions and wages and benefits of managerial employees were reduced in same amount.

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• Liberty Cab & Limousine Co., 194 B.R. 770 (Bankr. E.D. Pa. 1996). 35% reduction in “guaranteed” portion of wages, leading to overall reduction (including tips) of 13%.

• In re Almacs, 169 B.R. 279 (Bankr. D. R.I. 1994). Reduction of wages by 15% (later reduced to 12% and 9%), deferring 4% wage increase, and applying part-time wages and benefits to employees downgraded from full to part time; despite hardship to union members, changes were essential to Debtor’s continued operations and union offered no alternatives to eliminate losses.

• In re Chas. P. Young Co., 111 B.R. 410, 411 n.1 (S.D. N.Y. 1990). Relief from a contract provision that new wage and benefit terms would be set by interest arbitration (interim rejection becomes moot when contract expires) .

• In re Hoffman Bros. Packing Co., 173 B.R. 177 (9th Cir BAP 1994). Affirming prospective reduction of health and pension benefit costs by two thirds (but overturning nunc pro tunc reduction back to date of filing).

• In re Blue Diamond Coal, 131 B.R. 633, 638 (E.D. Tenn. 1991). First approving reduction in health and pension benefits, elimination of daily overtime, reduction in holidays and vacation pay, cap on wages, conditioned on 15% wage reduction for non-union employees; second order, eliminating restriction on debtor’s ability to purchase coal from contract miners.

• In re United Press International, 134 B.R. 507 (Bankr. S.D.N.Y. 1991). Reduction of wages to 80% level and various work rule relief.

• In re Garofalo’s Finer Foods, Inc., 117 B.R. 363 (Bankr. N.D. Ill. 1990). 15% reduction in labor costs, provided Debtor reduce compensation paid to six executives by 15%.

• In re Landmark Hotel & Casino, Inc., 78 B.R. 575 (9th Cir. BAP 1987). 15% wage reduction, elimination of future wage increases, limitation of paid vacations to two weeks, elimination of two holidays, pension contributions eliminated as to five unions; sixth allowed choice between no more pension contributions or equivalent reduction in wages up to 20%; conditioned on “snap-back” provisions and on one union’s arbitration of “most favored

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nations” clause; “without some modifications, this Debtor dies a financial death.”

• In re D.O. & W. Coal Co., 93 B.R. 454 (Bankr. W.D. Va. 1988). 10% reduction in wages and subsequent relief from obligation to make pension fund contributions (with production bonus if certain goals were met).

• In re Evans Products Co., 55 B.R. 231, 233 (Bankr. S.D. Fla. 1985). 17% reduction in wages and benefits. “. . .the plant will have to be closed if the negative cash flow cannot be arrested. There is no reasonable prospect of a market change in time to prevent the closing of the plant.”

• In re Russell Transfer, Inc., 48 B.R. 241 (Bankr. W.D. Va. 1985). 20% reduction of salaries and benefits of union employees, provided that management employees suffer a 10% cut.

• In re Salt Creek Freightways, 46 B.R. 347 (D. Wy. 1985). Reductions in wage rates, elimination of health and welfare payments, pension fund contributions, sick leave payments, and reduction in paid holidays and paid vacation, so that the Debtor’s ratio of expenses to revenue was reduced from 117% to 95.4%.

Interim changes disapproved:

• In re Wright Air Lines, Inc., 44 B.R. 744 (Bankr. N.D. Ohio 1984) (denying airline’s request to alter seniority for layoff under 1113(e) because financial projections not reliable; “no company witness was able to testify as to what dollar amount of savings would be required to enable the company to survive”; company sought to avoid pilot training cost of $71,000 – insignificant when airline losing $8000,000 per month).

• In re Cedar Rapids Meats, Inc., 117 B.R. 448 (Bankr. N.D. Iowa 1988) (debtor that had suspended operations sought interim relief to reject pension obligations; court held that accrual of potential priority claims in favor of retirees, the IRS and PBGC did not constitute “irreparable damage” for purposes of §1113(e)).

• In re Durastone Flexicore Corp., 159 B.R. 102 (Bankr. D. R.I. 1993) (stating, without discussion, that Debtor had failed to meet statutory requirements for relief under 1113(e); stating that court

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had not ordered continuation of contract beyond its expiration date as a form of interim relief).

• In re Ionosphere, 139 B.R. 772, 780-81 (S.D.N.Y. 1992). Bankruptcy court found that the Trustee’s proposed modifications of the CBA were necessary to avoid irreparable harm to Eastern’s estate. District Court reversed and remanded, holding that the Bankruptcy Court applied the wrong standard; and should apply the REA Express standard, 523 F.2d 164, 169 (rejection should be allowed only if CBA “will thwart efforts to save a failing carrier . . . from collapse).

The district court in Ionosphere stated:

[t]he Second Circuit has indicated that it views the standard for interim relief under § 1113(e) as substantially more burdensome than the standard for permanent rejection of a collective bargaining agreement. In Truck Drivers Local 807, Int’l Bhd. of Teamsters v. Carey Transportation Inc., supra, 816 F.2d at 89, the Court stated that “in the interim relief context . . . it is only proper that the court focus on the bare minimum requirements for short-term survival.” . . [T]he Court of Appeals views the standard for interim relief as placing a substantially higher burden on the Debtor to show economic necessity for the requested changes than it would need to show in order to obtain permanent relief after following the procedural requirements of § 1113.

Here, it appears that the bankruptcy court applied the less stringent standard for permanent relief set forth in supra, 816 F.2d at 90: . . . [c]ourt stated that “prompt cost reductions, including pilot labor cost reductions, are essential if an imminent liquidation of the estate is to be avoided,” Id. at 10, in summarizing the need for changes to the CBA, the bankruptcy court pointed to several long run considerations, such as the bargaining history of the parties and the need for Eastern to effect permanent cost reductions in order successfully reorganize: “Eastern’s staggering loss of over 1.2 billion dollars in the first thirteen months after its petition was filed have made it abundantly clear that Eastern will be unable to successfully reorganize without significant reductions in its costs, including its labor costs. Although Eastern and ALPA have been in negotiations for over three years, the bargaining

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process has failed to yield the modification in the collective bargaining agreement that would allow Eastern to successfully reorganize, and therefore, Eastern’s request for § 1113(e) relief is well founded and should be granted. Id. at 9-10.”

. . . [T]he standard for interim relief under § 1113(e) requires a showing that the short term survival of the Debtor is threatened unless immediate changes to the collective bargaining agreement are authorized. The bankruptcy court thus erred in taking into consideration the effects of interim relief on Eastern’s long term prospects for reorganization when it authorized modifications to the CBA under § 1113(e).

In re Ionosphere, 139 Bankr. 772, 780-81 (S.D.N.Y. 1992).

E. Appealability of interim order permitting emergency relief under 1113(e).

• Compare In re Landmark Hotel & Casino, 872 F.2d 857 (9th Cir. 1989) (can never be considered a final order; but note that application for rejection of CBA was pending at the time the bankruptcy court authorized interim changes pursuant to § 1113(e), the interim relief order was of limited duration, and an order authorizing rejection was ultimately issued. Id. at 858-59: “when further proceedings in the bankruptcy court will affect the scope of an order, the order is not subject to review in this court.” Id. at 860 (citation omitted))

• With In re Ionosphere: (distinguishing Landmark, holding that § 1113(e) modifications were appealable order where order was of unlimited duration, and there was no pending application for permanent modification or rejection of the CBA.)

F. Change in Relief Granted Under 1113(e). A court granting relief under 1113(e) may retain jurisdiction over the parties in order to modify the relief granted if the situation changes. In re Evans Products Co., 55 B.R. at 234; In re Almacs, 169 B.R. 279 (1994) (approving three successive interim modifications of 15%, 12% and 9% wage reduction, as circumstances altered).

G. Conditions Attached to Order Granting Interim Relief. In its equitable power, a court may condition an order granting interim relief on certain other changes not proposed by the Debtor. In re Russell Transfer, Inc., 48 B.R. 241 (Bankr. W.D. Va. 1985) (ordering reduction in compensation for executive and administrative employees

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parallel to that sought for rank-and-file employees ); In re Garofalo’s Finer Foods, Inc., 117 B.R. 363 (Bankr. N.D. Ill. 1990) (same, plus ordering parties to arrive at snap-back provision). In Landmark Hotel & Casino, Inc., 78 B.R. 575 (9th Cir. BAP 1987), the bankruptcy court fashioned an order under 1113(e) as a “compromise” solution to the issues posed in § 1113 bargaining, and granted the Debtor’s 1113(e) motion “on the terms and conditions” the court had established. The Ninth Circuit BAP held “The court was presented with a unique situation and repeatedly encouraged the parties to come up with their own solution to it. Finally, one of them did. While it was not one of the more orthodox solutions contemplated by Section 1113, we do not see how the bankruptcy court in any way exceeded his jurisdiction in approving it.”

IV. CONSEQUENCES OF REJECTION OR INTERIM CHANGE

A. Scope of Debtor’s Right to Change Terms Following Contract Rejection. Section 1113 does not address what terms the debtor may implement after a court approves rejection of the CBA. Bankruptcy judges occasionally have conditioned rejection upon the debtor’s implementation of specified terms in its own proposals or the union’s counterproposals. See, e.g., In re Condere Corp., 228 BR 615 (Bankr. S.D. Miss. 1998) (allowing rejection of certain terms on condition that debtor would implement its last best offer as to certain terms and the union’s last offer as to others). Since the Bankruptcy Code does not deal with the employer’s rights and duties after rejection, the question may be answered by referring to federal labor laws. In two unreported cases where CBAs were rejected prior to the adoption of § 1113, courts concluded that the debtor was not bound by Section 6’s status quo requirements and lengthy procedures before making subsequent changes in the terms implemented after rejection; rather, the debtor was required only to bargain to impasse – the same standard as under the NLRA. See Union of Flight Attendants v. Continental Airlines, Inc., No. 88-3517 (C.D. Cal. Aug. 22, 1988); Union of Flight Attendants v. Continental Airlines, Inc., No. H-85-5897 slip op. at 5 (S.D. Tex. Nov. 23, 1988).

B. Strikes and Injunctions. There is a theoretical basis for the Bankruptcy Code to override the anti-injunction provisions of the Norris-LaGuardia Act, and permit strike injunctions. Theoretically, if the employer’s business has been brought under the protective jurisdiction of the bankruptcy court and the object of the strike is to “obtain possession of property” of the employer (by forcing it to agree to new contract terms or make payments under a rejected CBA) or to “collect, assess, or recover a claim against” the employer (such as forcing it to make delinquent payments under a CBA or pension plan) then the strike is an “act” that the Bankruptcy Code automatically stays and the federal courts can enjoin. See 11 U.S.C. § 362 (automatic stay); 11 U.S.C. § 105 (bankruptcy court may enter injunctions, pursuant to the power to “issue any order, process, or judgment that is necessary to appropriate to carry out the provisions of this title”); see generally Thomas R. Haggard, “The Power of the Bankruptcy Court to Enjoin Strikes: Resolving the Apparent Conflict Between the Bankruptcy Code and the Anti-

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Injunction Provisions of the Norris-LaGuardia Act,” 53 Geo. U. L. Rev. 703, 708 (1985). But see, Crowe & Assoc., Inc. v. Bricklayers Local No. 2, 713 F.2d 211 (6th Cir. 1983) (vacating injunction against strike called to back up union’s demand that debtor pay money into union pension fund); Briggs Transp. Co. v. Teamsters, 739 F.2d 341 (8th Cir.), cert. denied, 469 U.S. 917 (1984) (strike to protest rejection of collective bargaining agreement is labor dispute that cannot be enjoined due to Norris LaGuardia); In re Petrusch, 667 F.2d 297 (2d Cir. 1981); In re Third Ave. Transit Corp. v. Quill, 192 F.2d 971, 973 (2d Cir. 1951); In re Kentucky Truck Sales, Inc., 52 B.R. 797, 806 (Bankr. W.D. Ky. 1985).

The NLRA, unlike the RLA, contains no inherent prohibition against strikes – any such protection is obtained, if an all, only through a CBA. If an NLRA debtor rejects its collective bargaining agreement, any express or implied no-strike clauses that previously were the basis for an injunction may no longer be in effect; therefore, the basis for a strike injunction may be gone. See Teamsters v. IML Freight, Inc., 789 F.2d 1460 (10th Cir. 1986) (reversing and remanding order approving rejection because bankruptcy court did not consider, inter alia, the likelihood that the employees would strike); Congressional Record Vol. 130, June 29 1984, p. 20092 (Remarks of Senator Packwood that if the trustee made changes after contract rejection under § 1113, “the union is also free to engage in strike activity since its no-strike obligation would no longer be binding.”). Under the Railway Labor Act, however, the duty in Section 2, First to exert every reasonable effort to make agreements continues to operate in the period following rejection of a CBA, and could serve as the basis for a strike injunction.

C. Claims Arising Out of Labor Contract Rejection.

1. Availability of Contract Rejection Damage Claims. Rejection of executory contracts in general gives rise to a claim for damages for breach of contract. 11 U.S.C. § 502(g). Under § 502(g), claims for unpaid wages and benefits arising from postpetition rejection of a collective bargaining agreement are treated as pre-petition claims, i.e., they are allowed or disallowed “as if such claim had arisen before the date of the filing”; therefore, claims for rejection of CBAs are general unsecured claims. See Bildisco, 465 U.S. at 531 (“Damages on the contract that result from the rejection of an executory contract . . . must be administered through bankruptcy and receive the priority provided general unsecured creditors.”). See also In re Continental Airlines Corp., 901 F.2d 1259 (5th Cir. 1990), cert. denied, 506 U.S. 828 (1992) (pre-1113 case; employees whose CBAs were rejected were entitled to contract rejection damages of the difference between contractual wages/benefits and the employer’s unilaterally set wages/benefits to the extent work would have been available had the agreements not been rejected; affirming bankruptcy court’s order disallowing contract rejection damages for time periods when employees were on strike); In re Continental Airlines, 981 F.2d 1450 (5th Cir. 1993) (Bankr. S.D. Tex. 1986) (reversing bankruptcy judge’s disallowance of pilots’ claim for contract rejection damages arising from pre-petition furlough). The one district court to squarely address the issue since the enactment of § 1113 held that rejection of

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CBAs is no longer covered by § 502(g), and does not give rise to claims for contract rejection damages, because § 1113 placed CBAs in an entirely different framework than other executory contracts. Section 1113, unlike § 365, contains no link to § 502(g), and therefore there is no claim for rejection of the labor contract, the court reasoned. Southern Labor Union, Local 188 v. Blue Diamond Coal Co., 160 B.R. 574 (E.D. Tenn. 1993) (§ 1113 is expressly made the exclusive mechanism for CBA rejection; § 1113, unlike § 365, did not contain any mechanism for damages; § 1113 is designed to help the debtor by making changes necessary for reorganization, and if § 1113 allowed damage claims for rejection, then rejection would not provide the full measure of necessary relief, and could prevent a successful reorganization by increasing the amount of claims against the debtor).

2. Duration of Contract Rejection Damage Claims. Assuming that claims for CBA-rejection are available at all, several issues arise regarding the period for damages. First, courts are split on whether there are any “damages” after the point the employer would have gone out of business anyway, absent rejection. Compare In re Continental Airlines Corp., 901 F.2d 1259, 1260, 1265 (5th Cir. 1990) (employees “would have had a claim for rejection damages--accruing until Continental ceased operations--had the contract not been rejected.…”); with U.S. Truck Co., 89 B.R. 618, 625 (E.D. Mich 1988) (so long as the debtor did in fact continue operations, the employees’ claims are not limited to what hypothetically might have occurred in the absence of rejection.). Second, the Bankruptcy Code limits damages claims “for damages resulting from the termination of an employment contract” to the amount of compensation earned within one year after the debtor files for bankruptcy, or the date the employee terminated, whichever is earlier. See 11 U.S.C. § 502(b)(7) (emphasis added). Bankruptcy courts have differed on the issue whether CBAs are “employment contracts” within the meaning of Section 502(b)(7), and subject to the one year limit. Compare In re N&T Assocs., Inc., 78 B.R. 285 (Bankr. D. Nev. 1987) (rejecting union’s argument that because the CBA did not itself establish an employment relationship between an employee and the debtor, the CBA was not an “employment contract” within the meaning of Section 502(b)(7)); In re Continental Airlines Corp., 64 B.R. 865, 873 (Bankr. S.D. Tex. 1986) (same); In re Continental Airlines Corp., 57 B.R. 845 (Bankr. S.D. Tex. 1986) (same); with In re U.S. Truck Co., Inc., 89 B.R. 618, 628 (E.D. Mich. 1988) (CBAs are not employment contracts and thus Section 502(b)(7) does not apply); Steelworkers of America, AFL-CIO v Cortland Container Corp., 105 B.R. 375, 379 (N.D. Ohio 1989); Matter of Gee & Missler Servs., Inc., 62 B.R. 841 (Bankr. E.D. Mich. 1986). A third factor that could limit the duration of employee damage claims is the date for re-opening the CBA. Continental, 65 B.R. at 873

D. Claims Resulting from Interim Changes Under § 1113(e). As discussed in Section III, above, Section 1113(e) authorizes the Bankruptcy Court to allow interim changes in labor contracts to the extent “essential to the continuation of the Debtor’s business.” One court has held that such interim changes are not partial

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rejections entitling employees to rejection damages for breach of the CBA. United Food & Commercial Workers Local 328 v. Almac’s, Inc., 90 F.3d 1 (1st Cir. 1996).

V. LABOR CREDITORS AND LABOR CLAIMS

A. Creditors Committee. The Official Creditors’ Committee plays a major role in bankruptcy proceedings, overseeing the administration of the estate by the Debtor-In-Possession. Each Official Committee2 retains counsel and other professionals (e.g., accountants, experts), all at the expense of the estate.

A union’s status as “creditor” stems principally from the “claims” of its members. Unions frequently have been appointed to the official creditors’ committee, which has significant input into many of the decisions in an airline bankruptcy. See In re Altair Airlines, 727 F.2d 88, 89 and n.2 (3d Cir. 1984); In re Trans World Airlines, Inc., 22 B.C.D. (CCR) 1236 (Bankr. D. Del. 1992) (upholding appointment of four union representatives to 15 member creditors’ committee). We understand that in the Midway Airlines bankruptcy proceedings, the Air Line Pilots Association (“ALPA”) not only was named as a member of the Creditors’ Committee, but was designated as Co-chair – a powerful position.

If the Debtor honors its labor contract obligations, as it is required to do absent court approval, it is possible that unionized employees and their unions will not become creditors at all. For non-union employees, however, Court approval is required for payment of pre-petition wages. Such approval is commonly granted, in the interest of retaining employees.

B. Prepetition Employee Claims. Claims for unpaid wages earned within 90 days prior to filing are entitled to third priority, subject to a maximum of $4,650 per employee. 11 U.S.C. § 507(a)(3). The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, signed into law on April 20, 2005, and effective October 17, 2005, raises the amount to $10,000 and increases the reachback period to 180 days. Section 507(a)(4) grants fourth priority to employee benefit claims in equal amount. Other prepetition employee claims are general unsecured claims, with no priority. Moreover, claims on prepetition employment contracts are limited to a maximum of one year’s compensation under § 502(b)(7), as discussed in Section IV.C.2. above.

C. Postpetition Employee Claims. Section 507(a)(1) grants first priority in payment to administrative expenses, which includes all expenses incurred in post-petition operation of the business by the Debtor and all expenses of administration of the estate. 2 There is usually one committee, but in large cases there can be more than one – e.g., Secured and Unsecured. In the first Continental Airlines bankruptcy, there were five official committees: Secured, Unsecured, Public Debt, Union Labor and Non-Union Labor.

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Thus, wages and benefits that accrue after the filing for bankruptcy are administrative expenses, which are given first priority. Administrative expenses, defined in 11 U.S.C. § 503(b)(1)(A), are paid in full, without any dollar limitation.

The Bankruptcy Consumer Protection Act of 2005, effective October 17, 2005, amends § 503(b)(1)(A) of the Bankruptcy Code to expand administrative expenses to include wages and benefits awarded post-petition as back pay, regardless of the time of the occurrence of the unlawful conduct to which the award relates, if the court determines that the award will not substantially increase the probability of layoff or termination of current employees or nonpayment of domestic support obligations during the case. In some cases, the amendment will transform what may otherwise have been pre-petition claims into administrative expenses.

Collective bargaining agreements continue in effect unless a bankruptcy court approves their rejection, per § 1113, as described more fully in section II above. Between the bankruptcy filing and rejection, employees have priority claims as administrative expenses for their wages and benefits under the CBA either because § 1113(f) preserves post-bankruptcy claims arising under a CBA, or under a quantum meruit theory. See Teamsters Industrial Security Fund v. World Sales, Inc., 33 C.B.C.2d 1691, 1700 (9th Cir. BAP. 1996) (granting employees’ post-filing health insurance claims priority as an administrative expense: “Section 1113 was enacted to protect employees during the interim between the filing of the bankruptcy petition and court-supervised modification or ultimate rejection of the CBA. During this period, working employees benefit the estate. Their rights accrue as services rendered on the basis provided in the CBA. These rights vest postpetition, and as indicated it would violate § 1113(f) to transform these rights into general unsecured claims upon subsequent rejection of the CBA.”); .”); Colorado Springs Symphony Orchestra Assn., 308 B.R. 508 (Bankr. D. Colo. 2004) (prior to date motion to reject was granted, musicians entitled to full payments under CBA as administrative expense, even though no rehearsals or performances were scheduled). After rejection of a CBA, employees have first priority administrative claims for the new level of wages and benefits implemented by the Debtor. After rejection of a CBA, employees have first priority administrative claims for the new level of wages and benefits implemented by the Debtor.

D. “Superpriority” of Labor Contract Claims in the Absence of Rejection Under § 1113. Section 1113(f) provides that “[n]o provision of [the Code] shall be construed to permit a trustee to unilaterally terminate or alter any provisions of a collective bargaining agreement prior to compliance with the provisions of this section.” If the Debtor does not reject the CBA under § 1113, as discussed more fully in section II above, unions have argued that § 1113(f) alters the normal priority scheme and compels specific performance of the CBA – not only for postpetition claims, but also for prepetition claims. Unions contend that this section trumps the standard claims priorities set forth in section 507 and mandates that employee claims under the collective bargaining agreement such as pre-petition vacation pay receive first priority as

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administrative expenses, because to do otherwise would allow the Debtor to evade its CBA without complying with § 1113. Courts are divided on this issue – the Second, Third and Fourth Circuits have applied the normal priority scheme, while other courts including the Sixth Circuit have compelled specific performance, or granted superpriority, to both pre- and post-petition claims arising from a CBA. Compare Adventure Resources, Inc. v. Holland, 137 F.3d 786 (4th Cir.), cert. denied, 525 U.S. 962 (1998) (“A debtor-in-possession . . . does not ‘modify’ an executory contract by failing to make payment during bankruptcy of amounts that are due under the contract on account of pre-petition services”); In re Ionosphere Clubs, Inc., 22 F.3d 403, 406-08 (2d Cir. 1994) (“application of the priority scheme of section 507 will not allow Eastern unilaterally to modify or terminate its obligations under the CBAs. . . . Eastern’s obligation to satisfy in full the vacation pay claims remains unchanged. Section 507 only establishes the priority of those claims, it does not affect the underlying obligation.”) and In re Roth Am., Inc., 975 F.2d 949, 954-58 (3d Cir. 1992) (vacation pay claims arising under a CBA are subject to the priorities in § 507 – first priority if earned post-petition and third priority if earned with 90 days of the petition, and general unsecured if earned more than 90 days prior to the petition); and In re Murray Indus, 110 B.R. 585, 588 (Bankr. M.D. Fla. 1990) (“the better view is one which reconciles § 507 with § 1113), vacated as moot, 140 B.R. 298 (M.D. Fla. 1992); and In re Rayman, Martin & Fader, Inc., 170 B.R. 286 (D. Md. 1994) (same); with Eagle, Inc. v. Local No. 537, United Ass’n of Journeymen, 198 B.R. 637, 638-39, (D. Mass. 1996); and Int’l Union v. Acorn Bldg. Components, Inc., 170 B.R. 317 (Bankr. E.D. Mich. 1994) (granting administrative priority status to both pre-and postpetition claims); and In re Golden Distrib., Ltd., 152 B.R. 35, 37 (Bankr. S.D.N.Y. 1992) (reasoning that only way full performance of a CBA can be assured is if claims are treated as administrative expenses”); and Steelworkers v. Ohio Corrugation Co., 23 C.B.D.2d 94, 1991 WL 21380 at *1, 1991 U.S. Dist. LEXIS 18815 at *2-*4 (N.D. Ohio March 15, 1991) (section 1113 grants a “priority to collectively bargained claims over and above the priorities set forth in §§ 503 and 507); and In re Arlene’s Sportswear, Inc., 140 B.R. 25, 27-28 (Bankr. D. Mass. 1992) (same). See also United Steelworkers v. Unimet Corp (In re Unimet Corp.), 842 F.2d 879 (6th Cir. 1988), cert. denied, 488 U.S. 828 (1989) (after Debtor failed to meet its burden to reject the CBA under § 1113, payment of insurance premiums for retirees was administrative expense, despite the fact that retirees are not employees whose wages are administrative expenses under §503, because § 1113 “unequivocally prohibits the employer from unilaterally modifying any provisions of the collective bargaining agreement,” and thus Unimet could not escape under the agreement even if the section 503(b) standard for administrative expenses could not be satisfied).

VI. NEW ISSUES PRESENTED BY “BANKRUPTCY PROTECTION” AGREEMENTS AND EQUITY ALLOCATION AGREEMENTS

In the course of concession bargaining in recent airline bankruptcies (or near-bankruptcies), airline unions have proposed that, in exchange for their “voluntary” agreement to concessions in lieu of rejection under § 1113, the Company agree to (1)

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assurance that the Company will not, absent extreme circumstances, file a § 1113 Motion during its Chapter 11 proceeding; and (2) assurance that the Company’s Proposed Reorganization Plan will include a prescribed level of equity for union-represented employees, or in lieu thereof, a stipulated pre-petition general unsecured bankruptcy claim. Some variant of such proposals have been agreed to at US Airways, United Air Lines, and American Airlines.

The willingness of major carriers to agree to such terms is not surprising, since the unions made such agreements a condition to billions of dollars of labor cost relief. Nonetheless, such agreements raise a variety of new issues which have not yet been explored by the courts. On the positive side, voluntary agreement on economic concessions is clearly one goal of § 1113, and labor peace can surely add value by enhancing the prospects for a successful reorganization. On the negative side, however, these new agreements present issues which could substantially complicate and delay the reorganization process. First and foremost, of course, are the questions relating to whether such agreements are enforceable at all, i.e.,

• Does the Debtor have the authority to enter such an agreement – which seems to be outside the ordinary course of business?

• Does such an agreement violate the fiduciary duties of the Debtor under the Bankruptcy Code?

• Are the creditors bound by such an agreement?

• Is the Bankruptcy Court bound by such an agreement?

A second category of questions relates to the impact of such proposals on the collective bargaining process contemplated by Section 1113:

• Can the Bankruptcy Court accept the labor concessions but refuse to approve these related agreements?

• What role may such proposals play in Section 1113 proceedings, where shared sacrifice and the balancing of the equities are factors to be considered?

• Are Section 1113 “protection” agreements and equity allocation mandatory subjects of collective bargaining? If not, can a Debtor refuse to consider such proposals, and can the Bankruptcy Court nonetheless consider the same subjects as equitable considerations?

A. Equity Allocation Agreements

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While it is understandable that a Union would want upside protection for its members in the event the reorganization is successful and the reorganized Company becomes profitable, the promise of equity interests of a prescribed dollar value raises another host of issues.

United Airlines agreed to terms in its labor concession agreements which require United to propose a Plan of Reorganization which assigns to the unions an amount of equity computed by a ratio of the dollar value of their concessions, over a 30 month term, to the dollar value of all general unsecured claims. If the confirmed Reorganization Plan does not provide for such equity, then the union will be entitled to a nonpriority prepetition general unsecured claim equal to 110 percent of that amount.

The allocation of equity to union-represented employees could have the effect of substantially diluting the proceeds of the Reorganization for the other general unsecured creditors. Such a provision also presumes full value for the arguably speculative proposition that the union-represented employees have in fact given up 30 months of value, since the labor contracts may have had a shorter period to run, and the circumstances suggest that the company could not have survived for more than a few months without the union concessions. See, e.g. In re Continental Airlines Corp., 901 F.2d 1259, 1260, 1265 (5th Cir. 1990) (employees had claims for rejection damages only until Continental would have ceased operations in the absence of labor contract rejection).

In the United agreement, the equity was to be provided “to the pilots [or other union] groups,” with the union to devise an equitable allocation formula. Such a group allocation may not be consistent with the Bankruptcy Code’s definition of a creditor as an identifiable individual or entity who holds a claim against the Debtor, because the Union allocation will presumably provide value to persons whose employment might not have continued for the full six years, whether due to death, disability, retirement or otherwise.

B. “Protection” Against Section 1113 Motions.

An unconditional agreement not to file a motion for relief under section 1113 (or 1114) would present major issues regarding the Debtor’s authority and fiduciary responsibilities. It is probably for this reason that the agreements which have been reached to date are (1) limited in duration; and (2) subject to exceptions for changed circumstances and force majeure events. For example, the United agreement voids the pledge not to seek relief under 1113 or 1114 in force majeure circumstances or “ . . . in the event the Company’s operating cash flow substantially and adversely deviates from the Company’s October 2002 ATSB business plan for a 90 day period, and such deviation presents a threat to the Company’s future liquidity . . .” These time limits and exceptions, of course, dilute the level of “protection” to the union-represented employees.

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There is some question how much “protection” is contained in an agreement not to file a § 1113 motion, since this agreement, too, theoretically might be rejected. Apparently to deal with this problem, agreements on the subject usually contain a series of factual representations by the Company which would make it more difficult for the Company to prevail on an 1113 motion absent dramatically changed circumstances. The agreements now typically provide that the voluntary modifications agreed to by the Company and the union already satisfy the primary criterion for rejection, i.e., they provide the degree of relief that is necessary to permit successful restructuring. If the carrier did later file a § 1113 motion, the union could defend against the motion on the basis that the carrier already had agreed that further proposed changes are unnecessary. But if the company’s financial condition worsens despite the voluntary concessions, an entirely new case of financial necessity would evolve – and rejection might be inevitable. It is thus not surprising that, several months after the protection letter was executed, when US Airways’ condition continued to deteriorate, the US Airways unions voluntarily agreed to yet another round of concessions.

VII. LITIGATION WITH THE DEBTOR

An issue with great impact is whether litigation arising out of labor and employment laws will be adjudicated in the bankruptcy court, or in the forum that otherwise would have had jurisdiction absent bankruptcy, e.g., a court, administrative agency, or arbitration board. In commercial matters, the bankruptcy court often supplants other tribunals, to ensure that any monetary judgments do not receive undue priority, and to conserve the assets of the estate and promote reorganization. Because of the underlying focus on successful reorganization, bankruptcy court generally is regarded as a favorable forum for the Debtor. If claims based in the labor laws are general unsecured claims, entitled to the lowest priority, an adverse resolution against the Debtor may have very little practical impact on the reorganization.

A. The Automatic Stay. When a Debtor files a petition under the Bankruptcy Code, an injunction automatically is triggered against the “commencement or continuation . . . of a judicial, administrative, or other action or proceeding against the Debtor . . .” 11 U.S.C. § 362(a)(1).

B. Police Power Exception. The automatic stay does not apply to “an action or proceeding by a governmental unit to enforce [its] police or regulatory power.” The government may not enforce a monetary judgment, however. 11 U.S.C. § 362(b)(4) and (5). For example, an NMB proceeding to decide representation issues is not covered by the automatic stay. In re Continental Airlines, 50 B.R. 342 (S.D. Tex. 1985), aff’d per curiam, 790 F.2d 35 (5th Cir. 1986).

C. Arbitration Under Labor Contracts. Most labor contracts, including all Railway Labor Act contracts, provide for mandatory arbitration of contract disputes. Section 1113(f) may prohibit the application of the automatic stay to an arbitration proceeding if stay of arbitration would be tantamount to unilateral modification or

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rejection of a CBA, without exhausting the procedures set forth in § 1113. In re Ionosphere Clubs, Inc., 922 F.2d 984 (2d Cir. 1990), cert. denied, 502 U.S. 808 (1991) (automatic stay did not prevent arbitration of labor protection dispute, because a contrary holding would nullify arbitration clause of CBA; in contrast, automatic stay did apply to union’s lawsuit to enjoin aircraft lease, because stay of litigation did not relieve carrier of obligation to arbitrate); In re Continental Airlines, 125 F.3d 120, 137 (3d Cir. 1997) (arbitration of dispute involving labor protective provisions should not be enjoined; “enforcement of the injunction would have the effect of permitting Continental to escape its duty to arbitrate under the collective bargaining agreement,” and thus court “decline[d] to enforce the statutory injunction in the absence of Continental’s compliance with the requirements of § 1113.”; however, arbitration award would be entitled only to the priority of any other unsecured pre-petition claim); compare In re Continental Airlines Corp., 60 B.R. 898, 901 (Bankr. S.D. Tex. 1986) (after CBA was rejected, claims for accrued sick pay must be decided by bankruptcy court, rather than arbitrator, because they would directly affect the amount of funds available to other creditors).

D. Removal. The Debtor may remove an action to bankruptcy court. 28 U.S.C. § 1452. The action then becomes an “adversary proceeding” to be decided by the bankruptcy court.

E. “Core” and “Noncore” Proceedings. District courts generally refer bankruptcy cases to the bankruptcy court in their district. 28 U.S.C. § 157(a). Bankruptcy courts may hear and determine “core” bankruptcy proceedings (i.e., civil proceedings arising under or in title 11 cases). In noncore proceedings – civil proceedings related to title 11 cases – bankruptcy courts may make advisory rulings only and the district court must make the final decision. See In re Ionosphere Clubs, Inc., supra, 922 F.2d at 995 (routine application of federal laws like RLA should be left to Bankruptcy Court; withdrawal of the reference from Bankruptcy Court is available only when “substantial and material consideration of non-Bankruptcy Code federal statutes is necessary. . . .”).

F. Estimation. Even if the bankruptcy court does not have jurisdiction to resolve a legal dispute, it may in certain circumstances “estimate” the value of contingent and unliquidated claims. This procedure allows the reorganization to go forward, and the litigant, if ultimately successful in another forum, may be able to recover only the amount estimated and included in the Reorganization Plan. 11 U.S.C. § 502(c). Claims for rejection of CBAs could be estimated by the bankruptcy court pursuant to § 502(c). See Bildisco, 465 U.S. at 531 n. 12; In re Continental Airlines, 981 F.2d 1450 (5th Cir. 1993) (Bankr. S.D. Tex. 1986) (vacating and remanding order estimating furlough claim at zero, due to bankruptcy judge’s failure to recuse himself).

VIII. MODIFYING RETIREE BENEFIT PLANS UNDER 11 U.S.C. §1114

A. Scope. Section 1114 of the Bankruptcy Code, 11 U.S.C. § 1114, expressly prohibits a Debtor in Possession from unilaterally modifying or terminating

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any medical, disability, death and other non-pension benefits of the bankrupt’s retired employees, their spouses and dependents. See 11 U.S.C. § 1114(e). Section 1114 imposes on the Debtor the obligation to negotiate and, if necessary, litigate any changes it seeks to make, and codifies a series of demanding substantive and procedural preconditions to any modification of those benefits. See 11 U.S.C. § 1114(a).3

B. Retiree Benefits Plans Do Not Include Pension Plans. A benefit program is covered by Bankruptcy Code section 1114 if it qualifies as an “employee welfare benefit plan” under the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1002 (2003). See Susan J. Stabile, Protecting Retiree Medical Benefits in Bankruptcy: The Scope Of 1114 Of The Bankruptcy Code, 14 Cardozo L. Rev. 1911, 1931-2 (1993). A non-pension benefit program is covered by ERISA (and thus by § 1114) if its benefits accumulate over time and are payable only upon the occurrence of a contingency outside the control of the employee. See Massachusetts v. Morash, 490 U.S. 107, 115-16 (1989); In re New York Trap Rock Corp., 126 B.R. 19, 22 (Bankr. S.D.N.Y. 1991). ERISA-covered pension plans are not subject to Section 1114.

C. Reachback Provision. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 amended Section 1114, adding a new provision Section 1114(l), which provides for judicial rescission of changes made to retiree benefits by an insolvent employer during the six month period preceding a Chapter 11 Petition, unless the court finds that the balance of the equities favors retaining the modification.

D. Protected Persons. Section 1114 covers the benefits of all retired employees (and covered dependents) regardless of the degree of control the retired employees exercised over the company’s operations or the positions they held prior to retirement. See New York Trap Rock Corp., 126 B.R. at 23; Dodd v. John Hancock Mutual Life Ins. Co., 688 F. Supp. 564, 571 (E.D. Cal. 1988). Section 1114 provides no protection, however, for any retiree who, in the year prior to the bankruptcy filing, had an annual gross income exceeding $250,000, unless that retiree can demonstrate to the bankruptcy court’s satisfaction that he or she is unable to obtain insurance on the open market that is comparable to that provided under the insurance plan the debtor offered prior to the bankruptcy. See § 1114(l); Daniel Keating, Congress’ Empty Response To The Retiree Plight, 67 Am. Bankr. L.J. 17, 32 (1993).

E. Application of Section 1114 Where Benefits Never Contractually Guaranteed. Several courts have held that § 1114 does not apply – and does not prohibit changes - where the company has specifically reserved the contractual right to terminate or modify retiree benefits in its plan documents. See, e.g., In re: N. Am. Royalties, Inc., 276 B.R. 860 (Bankr. E.D. Tenn. 2002) (holding that section 1114(e) creates no new obligations, but merely requires debtor to pay benefits in accordance with its non- 3 Benefit payments are granted administrative expense priority. Id. at § 1114(e)(2).

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bankruptcy obligations); Creditors’ Comm. of Retirees v. Raytech Corp., 43 C.B.C.2d 664 (Bankr. D. Conn. 1999) (§ 1114 does not apply when trustee terminates benefits and does not seek to modify benefits absent language promising vesting of rights and where plan reserved right to terminate or modify benefits); CF & I Fabricators of Utah, Inc. v. Coners, 163 B.R. 858, 874 (Bankr. D. Utah 1994); In re Doskocil Cos. Inc., 130 B.R. 870, 875-76 (Bankr. D. Kan. 1991) (same); In re: Federated Dept. Stores, 132 Bankr. 572 (Bankr. S.D. Ohio 1991) (same); cf. In re Chateaugay Corp., 945 F.2d 1205, 1210 (2d Cir. 1991), cert. denied, 502 U.S. 1093 (1992) (under predecessor provision to § 1114(e); company’s obligation to provide benefits limited by non-bankruptcy law); see also Collier on Bankruptcy, 5 Collier ¶ 1114. 03[2][a] at 1114-17 (16th ed. 1998) (“Section 1114 does not, however, protect retiree benefits beyond the contractual obligations of the debtor”); but see In re Farmland Industries Inc. , 294 B.R. 903, 914 (Bankr. W.D. Mo. 2003) (“section1114 prohibits a debtor from terminating or modifying any retiree benefits during a chapter 11 case unless the debtor complies with the procedures and requirements of §1114, regardless of whether the debtor has a right to unilaterally terminate the benefits.”); In re: Solutia Inc., No 03-17949 (PCB) (Bankr. S.D. N.Y. Order Oct. 26, 2004) (changes to retiree benefits that are permitted by the terms of such existing plan nonetheless require court approval under 1114); In re Ames Dep’t Stores, Inc., No. 92 Civ. 6145, 1992 U.S. Dist. LEXIS 18275, 3-4 (S.D.N.Y 1992) (holding debtor’s motion to terminate life insurance welfare benefit plan was properly denied notwithstanding debtor’s claim that it had contractual right to terminate plan). These cases illustrate the need to analyze the relevant plan documents to determine whether the section 1114 process is necessary in the first instance.

F. Procedural Steps to Authorize Modification. Retiree benefits subject to Section 1114 can be modified, pursuant to the procedures set forth in Section 1114, either by a court order or by an agreement between the debtor and the retirees’ authorized representative, which may be either a union or committee of retirees appointed by the court. See 11 U.S.C. § 1114(e)(1)(B). The procedural steps under Section 1114 are similar to the procedural steps required under Section 1113, but the role of a committee of plan beneficiaries presents new and difficult issues.

After the chapter 11 case has commenced but before the debtor seeks modification of retiree benefits from the court, the debtor is required to make a proposal to the authorized representative of the retirees setting forth the benefits modifications it seeks to make. See 11 U.S.C. § 1114(f)(1). 4 The debtor is then required to confer in 4 See Horsehead Indus., 300 B.R. 573, 588 (Bankr. S.D. N.Y. 2003) (“parties eventually stopped talking about current retiree benefits, viewing each other’s position as unreasonable and intransigent. Given the facts, the Debtors have failed to demonstrate that they attempted to “confer in good faith in attempting to reach mutually satisfactory modifications of such retiree benefits.” 11 U.S.C. § 1114(f)(2). Accordingly, their motion under § 1114 to terminate the health benefits payable to the current retirees is

(continued...)

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good faith with the authorized representative to attempt to reach a deal. See 11 U.S.C. § 1114(f)(2). As part of this process, the debtor must provide the authorized representative with “such relevant information as is necessary to evaluate the proposal.” 11 U.S.C. § 1114(f)(1)(B).5 While it may seem unlikely that the retirees would willingly agree to any consensual modification of their benefits, these negotiations take place in the context of the looming threat of mandatory, court-imposed modifications under § 1114. Thus, the retirees may conclude that they are better off cutting a consensual deal, shaping the deal to minimize the impact on the retirees to the extent possible, and avoiding the litigation process altogether. See Daniel Keating, Congress’ Empty Response To The Retiree Plight, 67 Am. Bankr. L.J. at 35-6.

A debtor’s request for modification should take the form of a motion rather than an adversary proceeding. See 11 U.S.C. § 1114(e)(1)(A). A motion presents fewer procedural requirements than would an adversary complaint. Compare Fed. R. Bankr. P. 9013 (forms and service of motion) with Fed. R. Bankr. P. 9014 (rules governing contested matters).

The court must schedule a hearing within fourteen days after receiving a motion for a modification of benefits. See 11 U.S.C. § 1114(k)(1). The court is given the discretion in section 1114(k)(1) to extend the fourteen day period by seven days where “the interests of justice require such extension, or for additional periods of time to which the trustee and the authorized representative agree.” Parties in interest must receive notice of the hearing at least ten days before the date of the hearing.

The court must rule on the debtor’s motion for modification within ninety days of the commencement of the hearing. See 11 U.S.C. § 1114(k)(2). This ninety day period may only be extended by the bankruptcy court “in the interests of justice” where both the debtor and the authorized representative agree to such an extension. If the court fails to make a ruling within ninety days of the commencement of the hearing or the extension period, the debtor may implement the proposed modifications pending the ruling of the court on its application for modification. See 11 U.S.C. § 1114(k)(2). (...continued) denied.”). In In re UAL Corp., No. 02-48191 (Bankr. N.D. Ill., Order Feb. 20, 2004), a federal bankruptcy judge appointed an Independent Examiner to determine whether United Airlines acted in bad faith by failing to inform employees that it would request modifications of retiree health benefit plans at the time many employees chose to take early retirement; the Examiner; on March 18, 2004, concluded that United did not conceal a plan to reduce retiree benefits in order to encourage early retirement. 5 Before it provides this information, the debtor may first seek a protective order from the court “to prevent disclosure of information provided to such representative where such disclosure could compromise the position of the debtor with respect to its competitors in the industry in which it is engaged.” 11 U.S.C. § 1114(k)(3).

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G. Role of Unions and Retiree Committees. Unlike § 1113, the benefit modifications provisions of § 1114 apply to the benefits of retirees who were non-union when employed as well as benefits provided pursuant to the terms of a CBA. In the non-union setting, authorized representatives will be appointed to represent the retirees. In the unionized case, the labor organization signatory to that agreement is designated by the statute as the authorized representative unless one of two conditions exists. 11 U.S.C. § 1114(c)(1). First, the labor organization may elect not to serve as the retirees’ authorized representative. Id. § 1114(c)(1) (A). Second, the court may conclude, upon motion of any party in interest, that different representation of union retirees is appropriate. Id. § 1114(c)(1)(B). This second condition recognizes that the labor organization will often have an inherent conflict of interest in attempting to represent simultaneously both union retirees and current union workers. Compare In re Matthew of Patrick Cudahy Inc., 88 B.R. 895 (E.D. Wis. 1988) (unions were not best entities to represent retirees when objectives of retirees and current employees conflicted); with In re North American Royalties, Inc., 276 B.R. 860 (Bankr. E.D. Tenn. 2002) (labor union was authorized representative of Chapter 11 debtor-employer’s retired hourly employees in part because there was no conflict of interest between the retired hourly beneficiaries and current employees). In circumstances where the labor organization does not serve as the authorized representative the bankruptcy court, on motion of a party in interest and after notice and a hearing, will appoint a committee of retired employees to serve that function. 11 U.S.C. § 1114(c)(2); (d). ). The Bankruptcy Consumer Protection Act of 2005 amends section 1114(d) so that the United States trustee, rather than the court, is responsible for appointing members to a committee of retired employees. This would make the appointments to the retiree committee consistent with the process for appointment of other committees. The rights and responsibilities of such a Retiree Committee have not yet been clearly developed; it would seem, however, that retirees would have powerful incentives to resist reductions in their benefits.

In its discretion, the court may appoint a committee under section 1114(c)(2) even though the debtor is under no obligation to pay future benefits if some other need would thereby be fulfilled. If the plan explicitly reserves the debtor’s right to amend, modify or terminate the plan as to future welfare benefits and there is no legal obligation under ERISA to refrain from such action, it is unnecessary for the court to appoint a committee to represent retirees, although the court may do so in its discretion. See In re Ames Department Stores, Inc., 76 F.3d 66 (2d Cir. 1996).

H. Court-Ordered Modification. If the debtor and the retirees’ authorized representative cannot reach a consensual agreement, the debtor can seek court-ordered modifications. See § 1114(e)(1)(A). Section 1114(g) requires the bankruptcy court to modify the retiree benefits at issue if it finds that the following three requirements have been met: (1) the debtor has made a proper proposal to the authorized representative; (2) the authorized representative has refused to accept such proposal without good cause; and (3) the modification is necessary to permit the reorganization of the debtor and assures

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that all creditors, the debtor, and all of the affected parties are treated fairly and equitably, and is clearly favored by the balance of the equities. 6

This standard is substantively identical to the one applied under § 1113, discussed in Section II.C. In re Family Snacks, Inc., 257 B.R. 884, 896-97 (8th Cir. 2000) (the § 1113 and § 1114 standards and procedures are intended to be identical).7

Section 1114, however, imposes a limitation not found in § 1113. Section 1114(g) prohibits the bankruptcy court from ordering a modification of benefits more significant than that contained in the debtor’s proposal to the retirees’ representative.8 Section 1114(g) does, however, expressly permit successive modification motions, so an order that proves to inadequately reduce the debtor’s obligation can be remedied in response to a subsequent motion. So long as the prerequisites are met, additional reductions in retiree benefits can be granted below the level of the debtor’s initial proposal. S. Rep. No. 100-199, P.L. 100-334 (July 17, 1987), reprinted in U.S.C.C.A.N. v. 4 p.688 (100th Cong. 2d Sess. 1988) (“[T]he trustee can seek more than one reduction in the level of retiree benefits . . . “).

Conversely, if the debtor’s business improves materially during the reorganization, the court will use the same standard in deciding whether to increase the modified level of payments. Id. (“[T]he authorized representative can seek more than one increase . . .” ) That is, the court will determine whether the modification that the retirees seek to undo continues to be “necessary to permit the reorganization of the 6 A federal bankruptcy judge appointed an examiner to determine whether United Airlines made the decision to request modifications in its retiree health benefit plans prior to encouraging employees to take early retirement in 2003. (In re UAL Corp. ( Bankr. N.D. Ill., No. 02-48191, order 2/20/04). 7 See also In re Ionosphere Clubs, Inc., 134 B.R. 515, 520 (S.D.N.Y. 1991)( “[I]t is clear that compliance with the substantive and procedural requirements for modification of retiree benefits under § 1114 also satisfies the substantive and procedural requirements for rejection of collective bargaining agreements under § 1113. When Congress enacted § 1114, it used the same procedures and standards as existed for modification or rejection of collective bargaining agreements under § 1113. Compare 11 U.S.C. §§ 1113(b) and (c) with 1114(e) and (g), respectively.”); S. Rep. No. 119, 100th Cong., 1st Sess. , pt. 1 at 6, reprinted in 1988 U.S.C.C.A.N. 683, 685. (“[t]he [Section 1114] standards are intended to be identical to those contained in Section 1113. In adopting this standard the Committee believes that it is important to use a standard with which the courts are already familiar. The Committee believes that the Section 1113 standards strike a fair and reasonable balance between the need to protect the rights of retirees and the rights of other creditors.”) 8 See Section IV.A. above for a discussion of what the debtor may implement following § 1113(c) rejection.

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debtor” and whether the retirees’ proposed increase in payments from the modified level “assures that all creditors, the debtor and all of the affected parties are treated fairly and equitably.” 11 U.S.C. § 1114(g). See Daniel Keating, Congress’ Empty Response To The Retiree Plight, 67 Am. Bankr. L.J. at 38.

I. Interim Modification. Where the debtor can show that an immediate modification of retiree benefits is “essential to the continuation of the debtor’s business, or in order to avoid irreparable damage to the estate,” the court can order interim modifications after notice and hearing. 11 U.S.C. § 1114(h)(1). The hearing for such an interim modification is scheduled according to the needs of the debtor, and the granting of interim modifications does not make moot the debtor’s motion for more “permanent” benefit modifications. See 11 U.S.C. § 1114(h)(2) and (3).