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1. In a trilogy of decisions arising out of the Chapter 11 bankruptcy cases of Eastern Airlines, Inc. (Eastern) and Continental Airlines, Inc. (Continental), the Court of Appeals for the Second and Third Circuits addressed the issue of the enforceability of mandatory arbitration provisions of a collective bargaining agreement in a Chapter 11 case.
2. The Airline Pilots Association, Inc. (ALPA) was the bargaining agent for Eastern's pilots. In February, 1986, Eastern's pilots ratified a new collective bargaining agreement (the Eastern CBA). The Eastern CBA provided for mandatory arbitration of any disputes arising under the Eastern CBA. Under the "labor protective provisions" of the Eastern CBA (the LPPs), Eastern's pilots secured protection of their seniority rights in the event of a merger between Eastern and another airline carrier through the integration of Eastern's seniority list with the merging carrier's list.
On February 24, 1986, Texas Air Corporation (Texas Air), Continental's parent, acquired Eastern. Believing that the acquisition constituted a "merger" within the meaning of the LPPs, ALPA requested a meeting with Texas Air, Eastern and Continental to discuss the integration of Eastern's and Continental's seniority lists.
Continental and Eastern refused to bargain with ALPA about integration of the seniority lists. ALPA accordingly sought to initiate an arbitration proceeding pursuant to the Eastern CBA to address the LPP dispute.
Eastern filed a Chapter 11 petition in the Southern District of New York in March 1989. Continental filed a Chapter 11 petition in the District of Delaware in December 1990. Neither Eastern nor Continental ever sought to reject the Eastern CBA pursuant to ' 1113 of the Code.
Eastern's attempt to reorganize eventually failed and Martin Shugrue was appointed to serve as the Chapter 11 trustee for Eastern. Continental consummated a plan of reorganization in April, 1993.
3. In the first case of the trilogy, various proceedings before the bankruptcy court in New York eventually resulted in two orders of the bankruptcy court concerning the Eastern CBA. One order denied ALPA's request that the automatic stay be lifted to permit it to proceed with arbitration of the LPP dispute. The second order enjoined ALPA from continuing a law suit which it had filed in the Southern District of Florida seeking to enjoin Eastern from leasing aircraft and crews from Continental on the grounds that these actions violated the Eastern CBA and the Railway Labor Act. These decisions were appealed to the district court and eventually the Second Circuit. In Shugrue v. Air Line Pilots Ass'n, International (In re Ionosphere Clubs, Inc.), 922 F.2d 984 (2d Cir. 1990), cert. denied, 502 U.S. 808, 116 L. Ed. 2d 28, 112 S. Ct. 50 (1991) (Ionosphere I), the Second Circuit held as follows:
We hold that application of the automatic stay provisions of ' 362 of the Bankruptcy Code is precluded by ' 1113(f) only to the extent that they permit a debtor unilaterally to terminate or alter a collective bargaining agreement. With respect to the LPP decision, we hold that application of the automatic stay to the arbitration brought pursuant to the collective bargaining agreement violated ' 1113(f) since it allowed Eastern unilaterally to avoid its obligation to arbitrate. We hold that the bankruptcy court may stay a non-bankruptcy judicial proceeding to enforce a collective bargaining agreement if the union can bring the dispute before the bankruptcy court and the bankruptcy court has jurisdiction to resolve it. With respect to the wet-lease decision, we hold that the bankruptcy court had jurisdiction to resolve the issues raised by the Florida action and, therefore, the stay of that action was not precluded by ' 1113(f). Finally we hold that 1113(f) did not prohibit the bankruptcy court from issuing an injunction against prosecution of the Florida action. We remand the case to the district court for further consideration of the wet-lease decision.
922 F.2d at 996.
4. In the second case of the trilogy, Air Line Pilots Ass'n v. Shugrue (In re Ionosphere Clubs, Inc.), 22 F.3d 403 (2d Cir. 1994) (Ionosphere II), the Second Circuit was called upon to interpret the scope of the "carve out" from the automatic stay for mandatory arbitration of Eastern CBA disputes which it recognized in Ionosphere I. The underlying issue was whether unpaid vacation pay claims held by ALPA members were entitled to "superpriority" treatment in Eastern's bankruptcy case pursuant to ' 1113(f) of the Code since Eastern never sought to reject the Eastern CBA under ' 1113. ALPA contended that the bankruptcy court should have abstained and compelled Eastern to arbitrate the priority issue. The bankruptcy court rejected ALPA's arguments, holding that the priority of the vacation pay claims would be governed exclusively by ' 507 of the Code with the result that most of the claims would be treated as general unsecured claims. The orders of the bankruptcy court were affirmed in part and reversed in part by the district court. The Second Circuit affirmed the district court in Ionosphere II, stating as follows:
Applying the analytical framework we established in Ionosphere I to the facts of this case, we hold that application of the priority scheme of 507 will not allow Eastern unilaterally to modify or terminate its obligations under the CBAs. In holding as we do, we are not drawing a mere semantical distinction. 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. As the district court recognized, "Judicial ordering of benefit claims pursuant to ' 507 is not equivalent to employer avoidance of obligations under a collective bargaining agreement. The collective bargaining agreement is respected, but the financial obligations issuing from it are accorded priority consistent with the Bankruptcy Code." Moreover, application of the priority scheme does not conflict with the purpose of 1113.
22 F.3d at 407 (citations omitted).
5. The third case of the trilogy arose out of Continental's Chapter 11 bankruptcy case which had been commenced in the District of Delaware. In Air Line Pilots Ass'n v. Continental Airlines (In re Continental Airlines), 125 F.3d 120 (3d Cir. 1997), cert. denied sub nom. LPP Claimants v. Continental Airlines, 140 L. Ed. 2d 113, 118 S. Ct. 1049 (1998), the Third Circuit was called upon to review the district court's affirmance of one decision and reversal of another decision of the bankruptcy court concerning the claims asserted under the Eastern CBA. The dispute arose from proofs of claim filed by ALPA in the bankruptcy court against Continental based on the seniority integration rights of ALPA's members under the Eastern CBA which ALPA contended were binding upon Continental and its debtor parent, Continental Airlines Holdings, Inc. While Continental initially contended that it was not a party to the Eastern CBA and was not otherwise bound by it, the courts eventually determined that Continental was liable for the claims held by the ALPA claimants predicated on the Eastern CBA.
The Third Circuit affirmed the holdings of the lower courts that the union members' seniority integration rights gave rise to "rights to payment" which were "claims" dischargeable in bankruptcy. 125 F.3d at 136.
Notwithstanding the district court's affirmance of the bankruptcy court's holding that the seniority integration rights were rights to payment dischargeable in bankruptcy, the district court reversed an injunction which the bankruptcy court had issued to prevent further arbitration of the LPP dispute. The district court's reasoning, which the Third Circuit adopted, was that because Continental was bound by the Eastern CBA and had never sought to reject the Eastern CBA pursuant to ' 1113 of the Code, enjoining arbitration of the LPP dispute would result in a unilateral alteration of a term of the Eastern CBA in derogation of ' 1113. In affirming the district court's reversal of the bankruptcy court on that issue, the Third Circuit stated:
Finally, we reject Continental's argument that it has no duty to arbitrate the LPP dispute.
* * *
In light of the overwhelming advantage that Continental derived from maintaining the position that it was bound by the collective bargaining agreement, and thus, had a duty to arbitrate the LPP dispute, we refuse to allow Continental to repudiate that representation and return to the district court to litigate the issue whether it is bound by the agreement . . . . Accordingly, we conclude that Continental is bound by its prior representations that it has a duty to arbitrate the LPP dispute.
125 F.3d at 137.
6. On or about October 23, 1998, Continental Airlines was sued in a class action in the federal district court in New Jersey by 300 former Eastern Airlines pilots for damages totaling more than $1 billion based upon the alleged breach of the Eastern Airlines CBA. The plaintiffs contend that Continental is bound by the CBA which was in effect between ALPA and Eastern Airlines when Texas Air purchased Eastern in 1986. The plaintiffs argue that the collective bargaining agreement is binding upon Continental because Continental and Eastern subsequently merged and neither Eastern nor Continental ever rejected the collective bargaining agreement pursuant to Section 1113 of the Code in their respective bankruptcy proceedings. The plaintiffs contend that they are owed salaries and back pay averaging $500,000 each and that, if the lawsuit is allowed to proceed as a class action, approximately 2,000 former Eastern pilots will be eligible to recover damages from Continental exceeding $1 billion.
Continental, of course, contends that the lawsuit is frivolous and, that in any event, any claims to which the plaintiffs might ultimately be entitled would be treated as general unsecured claims payable solely from any funds remaining for distribution to general unsecured creditors under Continental's confirmed Chapter 11 plan of reorganization.
The issue of whether Eastern and Continental ever actually merged remains to be decided by a labor arbitrator.
7. There seems to be a general agreement that Section 1113 governs only the modification and rejection of collective bargaining agreements. The assumption of such agreements is governed by Section 365 of the Code, which generally governs the assumption and rejection of collective bargaining agreements. The recent opinions adopting that view include the Fourth Circuit's decision in Adventure Resources, Inc. v. Holland, 137 F.3d 786 (4th Cir. 1998) and a decision by the Bankruptcy Court for the District of Delaware in In re Anchor Resolution Corp., 218 B.R. 330 (Bankr. D. Del. 1998).
I believe that these decisions are correct. However, in Adventure Resources, the Fourth Circuit announced another decision which may be controversial and have potentially significant consequences if it is followed. The Fourth Circuit held that a collective bargaining agreement which is not rejected pursuant to Section 1113 is, as a matter of law, deemed assumed by the debtor even if the debtor obtains no authorization from the court to assume the contract. The court announced this holding without any analysis whatsoever citing only some language found in an earlier opinion by the Third Circuit in In re Roth American, Inc., 975 F.2d 949 (3rd Cir. 1992). In Roth American, the Third Circuit, also with no analysis, made the following statement:
The union contends that since Roth American has not sought to reject the collective bargaining agreement under Section 1113, Roth American has "assumed" the collective bargaining agreement by operation of law, and that Roth American thus is bound by all of its terms. We agree with the Union up to this point.
973 F.2d at 957.
Notwithstanding these pronouncements by the Third and Fourth Circuits, both courts went on to hold in the cases at bar that the deemed assumption by the debtor did not mean transform all of the debtor's obligations under the contract into administrative expenses. Rather, both courts held that to the extent that the claims in question originated pre-petition, they would be entitled to priority only to the extent provided in the ordinary scheme of Section 507 of the Code.
While I agree with the general weight of authority that Section 1113 should not be interpreted to create superpriority claims, I question the validity of the statement of the Third Circuit in Roth American and the holding of the Fourth Circuit in Adventure Resources that claims arising from the breach of assumed collective bargaining agreements are not allowable in full as administrative expenses.
More troubling, moreover, are the holdings of the Third and Fourth Circuits that an unrejected collective bargaining agreement should be deemed assumed. It is true that the Second Circuit and Third Circuit in the Ionosphere and Continental cases held that a reorganized debtor or its successor may be bound by a collective bargaining agreement which is not rejected in accordance with Section 1113. I do not believe, however, those cases stand for the proposition that an unrejected CBA becomes an assumed CBA as a matter of law. If the collective bargaining agreement at issue in the Ionosphere and Continental cases was deemed to have been assumed by the debtors, I believe the result might very well be that the claimants in the pending New Jersey lawsuit could recover any monetary claims on a 100 percent on the dollar basis and could also obtain specific performance of their equitable remedies to the extent that equitable relief were still practicable. Such a result would clearly be at odds with the decisions of the Second and Third Circuits in Ionosphere and Continental which clearly held that any right of the former pilots to equitable relief would be treated as a monetary claim and such claim would be treated as a pre-petition general unsecured claim governed by Continental's plan of reorganization.
The Fourth Circuit's holding in Adventure Resources and the Third Circuit's statement in Roth American that an unrejected CBA is deemed assumed are also inconsistent with a decision by another panel of the Third Circuit in a case called In re University Medical Center, 973 F.2d 1065, which was handed down in 1992, the same year that Roth American was decided. At least there was no overlap in the composition of the two panels. In University Medical Center, the Third Circuit expressly rejected the notion that an executory contract could be "deemed assumed" by mere inaction, in other words, the failure of the trustee or debtor to seek to reject the agreement. On the contrary, the Court held, assumption required the filing of a motion pursuant to section 365 of the Code and court approval.
The Third Circuit's decision in University Medical Center is also inconsistent with another aspect of the Third Circuit's Roth American decision: In Roth American, the court held that certain obligations under an assumed CBA might not be entitled to administrative expense priority. By contrast, in University Medical Center, the court explicitly held that once an executory contract is assumed, all obligations thereunder become administrative expense obligations. There is nothing in any of these court decisions which suggests that the consequences of assuming a CBA should be different than the consequences of assuming any other type of executory contract. Nor do I believe that anything in sections 365 or 1113 would support special treatment for assumed CBA's.
7. In the wake of the Second Circuit's decisions in Ionosphere, a few courts have considered the effect of Section 1113 on the avoidance powers. In Jones Truck Lines, Inc. v. Central States, Southeast and Southwest Areas Pension Fund (In re Jones Truck Lines, Inc.), 130 F.3d 323 (8th Cir. 1997), a Chapter 11 debtor-employer sued to recover as preferential transfers $6,000,000 in employee benefit payments made to employee benefits funds during the 90-day period prior to the filing of the petition. The bankruptcy court and district court ruled in favor of the debtor. The Eight Circuit reversed, holding that the debtor was not entitled to recover because the debtor had received new value in exchange for the employee benefits in the form of continued employee services and the benefits were intended as contemporaneous and in fact were substantially contemporaneous exchanges for new value. However, the Eighth Circuit affirmed the lower court's holding that the debtor's claims were not precluded by Section 1113. The court's reason that Section 1113 only prohibits "post-petition conduct by the debtor in a Chapter 11 reorganization" whereas "the trustee for a liquidating debtor who sues to recover avoidable preferences is not attempting to unilaterally terminate or alter the collective bargaining agreement. It should be noted that the plaintiff in Jones Truck was a debtor-in-possession, not a trustee.
The Eight Circuit's holding in Jones Truck should be compared with a more recent decision by a bankruptcy court in the district of Oregon in In re Highway Transportation Co. of Delaware, 224 B.R. 457 (Bankr. D. Ore. 1998). In Highway Transportation, the debtor made post-petition payments to various employees for accrued vacation time. Some of the vacation time was earned pre-petition and some was earned post-petition. The union representing the employees subsequently filed proofs of claim on behalf of the employees. The debtor, in objecting to the claims, contended, inter alia, that the payments made to the employees for accrued pre-petition vacation time were voidable transfers recoverable pursuant to Section 549 of the Code. The bankruptcy court disagreed, holding that by virtue of its obligations under Section 1113 of the Code, the debtor was not only authorized, but was, indeed, required to pay all of the accrued vacation pay, whether it had accrued pre-petition or post-petition, unless and until the debtor was relieved of its obligation to fully comply with the collective bargaining agreement pursuant to Section 1113.
The bankruptcy court's decision in Highway Transportation should be compared to an earlier decision by the United States District Court in Tool & Dye Makers Local Lodge No. 113 v. Buhrke Industries, Inc., 1996 U.S. Dist. LEXIS 3314 (N.D. Ill., March 14, 1996). In that case, the employee claimants contended that the debtor was required to make immediate payment of vacation benefits which were earned pre-petition but which "matured" shortly after the filing of the petition. The employees contended that a failure to make immediate payment of such claims would constitute a unilateral alteration of the collective bargaining agreement on which the claims were based under Section 1113 of the Code. The debtor conceded that the claims were entitled to administrative priority but refused to make immediate payment. The district court affirmed the holding of the bankruptcy court but payment of the claims could be deferred and provided for under the plan of reorganization. The bankruptcy court for the Northern District of Illinois reached a similar decision in In re Moline Corp., 144 B.R. 75 (Bankr. N.D. Ill. 1992), appeal denied, 1992 U.S. Dist. LEXIS 14202 (N.D. Ill., Sep. 17, 1992).