In Re Mile Hi Metal Systems, Inc., Debtor. Sheet Metal Workers' International Association, Local 9 v. Mile Hi Metal Systems, Inc.In Re Mile Hi Metal Systems, Inc., Debtor. Sheet Metal Workers' International Association, Local 9 v. Mile Hi Metal Systems, Inc.
Lead Opinion
This appeal requires us to interpret for the first time
“those necessary modifications in the employees [sic] benefits and protections that are necessary to permit the reorganization of the debtor and assures that all creditors, the debtor and all of the affected parties are treated fairly and equitably.”
The district court ruled that in no event may the proposed modifications violate federal labor laws, and that for a debtor’s motion to reject a collective bargaining agreement to be granted the debtor must propose only modifications to the agreement which are absolutely necessary for it to reorganize. Because we disagree on both counts, we reverse the judgment of the district court and remand the case for further proceedings.
I. FACTUAL AND PROCEDURAL BACKGROUND
On April 12, 1985, appellant-debtor Mile Hi Metal Systems, Inc., filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code. Thereafter, members of appellee Sheet Metal Workers’ International Association, Local No. 9 (“the Union”) walked off the job sites and Mile Hi hired non-Union replacement workers. On June 10, Mile Hi filed a motion to reject its collective bargaining agreement with the Union.
Attached to the motion was a copy of a letter which Mile Hi had sent to the Union twelve days earlier, setting out proposed modifications in the collective bargaining agreement. Two of the proposed modifications, plus one subsequent oral statement by a Mile Hi representative, are relevant to this appeal. They are as follows:
“1. That Article 5, paragraph 5-1 [of the collective bargaining agreement] be modified to reflect that the employer will be permitted to hire Non-Union permanent employees as replacements for strikers without the requirement that those employees become Union members except and unless such employees desire membership in the Union.
3. That Article 4, paragraph 4-4 be modified to reflect that a Steward will only be required if there are three (3) or more Union employees on any job.”
R.Vol. I at 25-26 (emphasis in original). During the hearing on the motion, one of
No meetings or negotiations between the parties took place until after Mile Hi applied for authorization to reject the agreement. The parties met once before the hearing, with no success. Shortly after the hearing commenced, the bankruptcy court adjourned the proceedings to allow further negotiation. No result came from these meetings, either. The Union’s position in the negotiating sessions was that some of the proposed modifications were illegal as a matter of labor law, and that it would consider no part of the proposal until the offending provisions were eliminated. Mile Hi’s representatives insisted upon the legality of the provisions and refused to delete them.
The hearing resumed, and Mile Hi’s motion was granted. The bankruptcy court did not consider the Union’s allegations that some of the modifications were contrary to labor law. Instead, the court stated:
“[T]he Union ... has alleged that there were illegal provisions in the hiring of non-Union replacements and the Court finds that it has no jurisdiction or authority to decide that issue but finds that it is not a basis to reject the proposal in total [sic] and that the Union should have, in good faith, accepted all other provisions so that there could have been a determination of whether or not that specific proposal was acceptable.”
Order on Debtor’s Motion to Reject Collective Bargaining Agreement, June 20, 1985, p. 3.
The district court reversed, declaring the bankruptcy court’s refusal to consider the Union’s allegations to be an error of law. See In re Mile Hi Metal Sys., Inc.,
II. DISCUSSION
“(b)(1) Subsequent to filing a petition and prior to filing an application seeking rejection of a collective bargaining agreement, the debtor in possession ... shall—
(A) make a proposal to the authorized representative of the employees covered by such agreement ... which provides for those necessary modifications in the employees [sic] benefits and protections that are necessary to permit the reorganization of the debtor and assures that all creditors, the debtor and all of the affected parties are treated fairly and equitably;
(2) During the period beginning on the date of the making of a proposal provided for in paragraph (1) and ending on the date of the hearing provided for in subsection (d)(1), the [debtor-in-possession] shall meet, at reasonable times, with the authorized representative to confer in good faith in attempting to reach mutually satisfactory modifications of such agreement.
(c) The court shall approve an application for rejection of a collective bargaining agreement only if the court finds that—
(1) the [debtor-in-possession] has, prior to the hearing, made a proposal that fulfills the requirements of subsection (b)(1);
(2) the authorized representative of the employees has refused to accept such proposal without good cause; and
(3) the balance of the equities clearly favors rejection of such agreement.”
The legislative history of
The Bankruptcy Code cuts across a broad spectrum of other areas of law in order to afford a debtor the opportunity to reorganize. The most pertinent example is
“[Wjhen an employer is in Chapter 11, the normal rules of labor law cannot be applied unqualifiedly but must be balanced by the policies of the Bankruptcy Code.” Gibson, The New Law on Rejection of Collective Bargaining Agreements in Chapter 11: An Analysis of
Conflicts between bankruptcy and labor law policies must be addressed case by case. The court shall balance any illegality against other considerations, but shall keep in mind that there must be a limit to permitting proposals which would violate labor law, both because of the nature of various substantive provisions of that law and because of the nature of
Even though the burden of persuasion will rest with the debtor on the sub
B. The Requirement that the Modifications Be “Necessary”
Just what Congress meant when it used the word “necessary,” which appears twice in
“places on the debtor the burden of proving that its proposal is made in good faith, and that it contains necessary, but not absolutely minimal, changes that will enable the debtor to complete the reorganization process successfully.”
Truck Drivers Local 807 v. Carey Transp., Inc.,
Of course, the debtor may not overreach under the guise of proposing necessary modifications. The proposals must be more than potentially helpful; they must be directly related to the debtor’s financial condition.
C. Whether the Oral Statement Should Have Been Considered
The district court adopted the Union’s position that the verbal reference to a wage differential between Union and nonunion replacement workers made by a Mile Hi representative during the hearing on Mile Hi’s motion, R.Vol. IV at 38, was a separate proposed modification. See In re Mile Hi Metal Sys., Inc.,
“The court is to consider a debtor’s proposal only to the extent the proposal was made prior to the commencement of the rejection hearing. It is only sensible that the court have a fixed point in time to look to as otherwise the court would be trying to deal with a constantly moving target as a debtor altered its proposal during the course of the trial.”
In re Royal Composing Room, Inc.,
Of course, this does not mean that all statements made after the commencement of the rejection hearing must be disregarded. Statements explaining existing proposals are an important reason for having such a hearing. Only statements making new proposals are improper.
III. CONCLUSION
Because of the incorrect interpretation and application of the statute by the courts
Judgment VACATED, and the case is REMANDED.
Notes
. The Union has moved to dismiss this appeal on the grounds of mootness, based on the fact that Mile Hi’s Chapter 11 proceedings were dismissed during the pendency of the appeal after Mile Hi’s business failed and it ceased operations. An arbitration proceeding between the parties involving the collective bargaining agreement was allowed to go forward simultaneously with the proceedings in the bankruptcy court, and resulted in an award against Mile Hi for approximately $700,000. The basis of the award is Mile Hi’s failure to abide by the agreement after the district court retroactively reinstated it, following the bankruptcy court’s decision. Thus, the basis of the award is directly affected by this appeal. Because the Union has made it clear that it intends to pursue this award against Mile Hi (which continues to exist as a corporate entity) and whatever other targets present themselves, a controversy between the parties still exists sufficient to sustain our jurisdiction. See Haig Berberian, Inc. v. Cannery Warehousemen,
Because we have continuing jurisdiction, the bankruptcy court continues to have residual jurisdiction sufficient to entertain the remand which we direct the district court to make, and to conduct further proceedings consistent with this opinion. In fact, while this appeal was pending the bankruptcy lacked the power to divest itself of jurisdiction over this matter. Cf. Gormong v. Local Union 613,
. Far from being a dead letter, as the concurring opinion implies, infra at 897, Bildisco "remains an important indicator” of the meaning of the Bankruptcy Code. In re Sierra Steel Corp.,
. Without any proceedings below on the effects of the disputed provisions, this court would have to rely upon conjecture in order to decide whether this is such a case. That opinion would be merely advisory. See Halder v. Standard Oil Co.,
. This will put the bankruptcy court in the disfavored position of evaluating laws in an area outside of its expertise, but consideration of other areas of the law is common in bankruptcy courts. Recent examples include In re Lombardo Fruit & Produce,
There also is a danger that a bankruptcy court will decide that a certain proposal is or is not illegal, then a subsequent NLRB decision will reach a different result. This risk is a necessary evil, though, for requiring the bankruptcy court to suspend its proceedings and await a decision of the NLRB would be unworkable.
.The NLRB has exclusive jurisdiction over such matters, even during the reorganization process. NLRB v. Superior Forwarding, Inc.,
.The contested wage differential issue yields a perfect example of the Union’s default in its obligation to negotiate in good faith. The Union stonewalled, but had there been true negotiations, the parties could have worked out a system under which new hires, whether or not Union members, would be paid less than current workers, and this would have been perfectly lawful. See Truck Drivers Local 807 v. Carey Transp., Inc.,
We do not decide the proper consequences of a refusal to confer in good faith, but clearly some adverse consequence should befall an intransigent party. At the very least, a union’s lack of participation should be considered when the court decides whether the union had good cause to reject the proposal, id. at 92; In re Royal Composing Room, Inc.,
. Webster’s Third New International Dictionary 1511 (1981). But see McCulloch v. Maryland,
. This appeal does not present the question of whether
. Differences in formulation notwithstanding, we believe that the standard proposed in the concurring opinion — that "the debtor must prove that reorganization will probably fail in short order absent such modification," infra at 897 — would in practical effect be identical to the Wheeling-Pittsburgh standard. We decline to adopt it for the same reasons we choose not to follow Wheeling-Pittsburgh.
. Another safeguard against overreaching is the fact that rejection of a collective bargaining agreement could give rise to a strike or other labor action which would actually decrease the likelihood of a successful reorganization. See NLRB v. Bildisco & Bildisco,
Concurrence Opinion
concurring.
While I concur in the Court’s decision to remand this case for further findings of fact, I write separately because I must take issue with the majority’s construction of the term “necessary,” with its discussion of illegal proposals, and with its suggestion that some “adverse consequence” should befall the union.
I.
NECESSARY
The majority correctly observes that in ordinary usage, the word “necessary” generally means “absolutely required.” An initial reading of the statute, then, would suggest that a proposal “which provides for those necessary modifications ... that are necessary to permit the reorganization of the debtor” should contain only essential modifications.
The majority’s rationale for rejecting the common reading of “necessary” and following the Second Circuit’s construction consists of conclusory statements, not arguments. The majority simply notes that necessary can be read a variety of ways
The fact that necessary can be construed in a number of different ways begs the question of how the word should be construed. The majority avoids addressing the problem of multiple interpretation, insisting instead that the Court must “confine [its] analysis ... to the words of the statute itself” and must refrain from using a legislative history it describes as “little more than self-serving statements by op
“The word ‘necessary’ ... has not a fixed character, peculiar to itself. It admits of all degrees of comparison ... A thing may be necessary, very necessary, absolutely or indispensably necessary.”
McCulloch v. Maryland,
Looking first at the structure of the statute for interpretative assistance, the repetition of “necessary” in
“[t]he word ‘necessary’ inserted twice into this provision clearly emphasizes this required aspect of the proposal which the debtor must offer.”
130 Cong.Rec. S8898 (daily ed. June 29, 1984).
At the other end of the spectrum, an extremely strict interpretation of necessary seems equally inconsistent with the statutory language since if all proposed modifications must be absolutely necessary, then the duty imposed by
The statute’s legislative history, the majority correctly notes, consists of contradictory floor statements by members of the House and Senate. No explanatory Committee Reports were issued.
Congress enacted The Bankruptcy Amendments and Federal Judgeship Act of 1984, of which
“the Bankruptcy Court should permit rejection of a collective-bargaining agreement ... if the debtor can show that the collective-bargaining agreement burdens the estate, and that after careful scrutiny, the equities balance in favor of rejecting the labor contract.”
Id. at 526,
The Bildisco decision was handed down in February 1984, and it sparked extensive lobbying by representatives of both organized labor and management. See Ritchey, Rejection of Collective Bargaining Agreements:
The Supreme Court ruling also prompted the introduction by Congressman Rodino of a bill in the House,
Viewing the plain language, the statutory structure, and the context together, it becomes apparent that Congress intended neither that “necessary” should be taken to mean absolutely necessary, nor that it should be interpreted as merely convenient. Instead, a reading of “necessary” must reflect the compromise achieved and must balance the pro-collective bargaining policies of the National Labor Relations Act with the goals of reorganization.
II.
ILLEGAL PROPOSALS
In its discussion of allegedly illegal proposals, the majority concludes, as did the district court, that a bankruptcy court should consider labor law violations “case by case ... [and] balance any illegality against other considerations.” Opinion at 891. While I agree with the language of this standard, I find the balancing suggested problematic. The majority cites Bildis-co to stand for the proposition that Chapter 11 represents a strong policy favoring flexibility for the debtor to reorganize. Of course, as noted above,
III.
ADVERSE CONSEQUENCE
The majority concludes that the good faith language of
IV.
CONCLUSION
The speed with which Congress enacted
Even more troubling is a glaring omission: there is no discussion by Congress of how to deal with conflicts between bankruptcy and labor laws. Specifically, Congress has given courts little guidance on handling situations in which a union argues that the company-proposed modifications to a collective bargaining agreement would constitute an unfair labor practice. Congress thus has left us hanging.
On the merits of this case, I agree with the majority that the case must be remanded to the bankruptcy court for further proceedings. Contrary to the majority, I would instruct the bankruptcy court to apply an interpretation of “necessary” that reflects Congress’ rejection of the lenient Bildisco standard in favor of a more stringent test. In evaluating the necessity of the proposed modifications, the bankruptcy court should assess both the need for the suggested wage cuts for union members and whether alternatives existed to such cuts. Additionally, the court should consider whether modifications that arguably violate labor laws constitute “good cause” for the union to refuse to negotiate or whether they undercut Mile Hi’s assertion that the proposed changes are “fair and equitable.”
. See Opinion at 893, following Truck Drivers Local 807 v. Carey Transp., Inc.,
. The majority also asserts that its position is consistent with "the majority of cases.” See Opinion at 892. I find it surprising that the majority so easily finds that a majority rule exists. Only two circuits have addressed this issue and they have reached opposing results. The Third Circuit adheres to a strict reading of "necessary," see Wheeling-Pittsburgh Steel Corp. v. United Steelworkers,
.See Opinion at 893. The assumption that a more lenient standard will improve the chances for a debtor’s successful reorganization may be ill-founded. At least one commentator, and the dissenting justices in Bildisco, have concluded that such leniency may lead to "strikes, boycotts, [and] walk-outs” and hence “ ‘decrease the prospects for a successful reorganization.’ ” Rosenberg, Bankruptcy and the Collective Bargaining Agreement — A Brief Lesson in the Use of the Constitutional System of Checks and Balances, 58 Am.Bankr.L.J. 293, 303 (1984).
In addition, I fail to see how limiting the debtor to proposed modifications that "directly relate ... [to its] financial condition,” Opinion at 893, protects the union in any way; it is precisely this indiscriminate ability of debtors to suggest modifications designed to enhance their own financial position that
. The majority does acknowledge that analysis of the statutory language should "tak[e] into account other judicial interpretations.” Opinion at 890. But where, as in this case, there is such a clear split among the courts, some interpretive tool is needed to help decide from among them.
. The repetition of the word necessary also may be seen as emphasizing “the requirement of the debtor’s good faith in seeking to modify its existing labor contract." Century Brass Prod., Inc. v. International Union, United Automobile Workers (In re Century Brass Prod., Inc.),
. In Carey Transportation, the court pointed out that
“[bjecause the statute requires the debtor to negotiate in good faith over the proposed modifications, an employer who initially proposed truly minimal changes would have no room for good faith negotiating, while one who agreed to any substantive changes would be unable to prove that its initial proposals were minimal.”
. The majority attributes this omission to an inability to reach an agreement. In fact, the speed with which the bill was enacted accounted for the lack of Committee Reports. See Note, Rejection of Collective Bargaining Agreements by Chapter 11 Debtors: The Necessity Requirement Under
. See McCulloch,
. The Bankruptcy Reform Act of 1898 required an insolvency showing; the Bankruptcy Reform Act of 1978 eliminated this requirement.
. See H.R. 4908, 98th Cong., 2d Sess., 130 Cong.Rec. H809 (daily ed. February 22, 1984). Congressman Rodino later introduced a modified version of the bill, and it was the modified version that the House passed. See H.R. 5174, 98th Cong., 2d Sess., 130 Cong.Rec. H1727 (daily ed. March 19, 1984).
. See Brotherhood of Ry. Clerks v. REA Express, Inc.,
"rejection ... should be authorized only where it clearly appears to be the lesser of two evils and that, unless the agreement is rejected, the carrier will collapse and the employees will no longer have their jobs.”
. See Rosenberg, 58 Am.Bankr.L.J. at 318 ("it became clear that the members of the Senate were looking for a compromise so that they would not be viewed as having cast a vote for or against anyone”).
. REA Express embodies the strictest end of the rejection-standard spectrum, while the so-called "business judgment test," which applies to ordinary executory contracts, occupies the other end. See, e.g., In re W. & L. Assoc., Inc.,
“We do not consider the 'business judgment test’ to be a strict standard to meet. Rather, the test merely requires a showing by the ... Debtor-in-Possession that rejection of the contract will be likely to benefit the estate."
. The majority contends that I have buried Bildisco too quickly since
The majority cites to In re Fiber Glass Industries, Inc.,
Finally, the majority cites to our dicta in International Brotherhood of Teamsters v. IML Freight, Inc.,
The majority also fails to note that in IML Freight we go on to emphasize that
"the special nature of labor contracts is rooted in the national policy which favors collective bargaining in employment and that Congress has strongly cautioned the bankruptcy courts to be considerate of that policy.”
Id. at 1462.
. For one opinion analyzing the legislative history and interpreting
. I agree with the majority that the debtor bears the burden of proof on the necessity requirement. Opinion at 891; see In re American Provision Co.,