This аppeal involves the showing a debt- or-employer must make in order to obtain Bankruptcy Court approval of the employer’s application to reject a collective bargaining agreement in accordance with 11 U.S.C. § 1113. We agree with the conclusions and, for the most part, the analysis of the Bankruptcy Court for the Southern District of New York (Burton R. Lifland, J.). Therefore, we affirm the decision of the United States District Court for the Southern District of New York (Richard Owen, J.) upholding Judge Lifland’s approval of Carey Transportation’s application to reject two collective bargaining agreements with Truck Drivers Local 807 (“Local 807” or “the union”).
*85 FACTS AND PROCEEDINGS BELOW
Carey, a wholly owned subsidiary of Schiavone Carrier Corporation, commenced this litigation by filing a voluntary reorganization petition under Chapter 11 of the Bankruptcy Code in April 1985. Carey, both prior to and since that filing, has been engaged in the business of providing commuter bus service between New York City and Kennedy and LaGuardia Airports.
Local 807 has been the exclusive bargaining representative of Carey’s bus drivers and station employees. Local 807 and Carey entered into collective bargaining agreements covering these two groups of employees on August 20, 1982, thereby settling a sixty-four day strike by union members. These two agreements were scheduled to expire on February 28, 1986.
Carey officials have blamed the strike for a subsequent 30% droр in ridership and the yearly revenue losses that preceded its filing for reorganization. Carey has operated at a loss since at least December 31, 1981, reporting annual losses of $750,000 for fiscal year 1983, $1,500,000 for fiscal year 1984, and $2,500,000 for fiscal year 1985. Jt.App. 226.
In September 1983, Carey terminated fifty Local 807 members employed as station workers, although an arbitrator later directed that ten of them be rehired with backpay. The net result of these forty layoffs, according to Carey officials, has been an annual cost savings of approximately $1 million. Jt.App. 174.
In 1984 and 1985, Carey sought and obtained concessions from a union representing Carey's mechanics and repair-shop workers. Those concessions led to layoffs of approximately eight workers and annual cost savings estimated at $144,000. Jt. App. 372-74.
In June 1984, Carey proposed several modifications in its agreements with Local 807. After negotiations, Local 807 and Carey agreed on certain supplemental provisions applicable only to drivers hired after July 1, 1984. These “second-tier” drivers would not get any paid sick days, and they would receive significantly reduced wages, overtime pay, and benefits. These changes, according to Carey, yielded savings of only $100,000 prior to Carey’s filing for bankruptcy. The reason given for the relatively small savings was that seasonal variations in industry business resulted in few drivers being hired after the effective date of the Supplement. Jt.App. 380-81.
On January 31, 1985, counsel for Carey wrote to Local 807 representatives, requesting additional modifications of the two agreements. A series of meetings took place during February and March of 1985, with Carey warning that a failure to reach agreement could force the company to file a Chapter 11 petition and, most likely, apply for permission to reject the existing agreements. Jt.App. 544-46. Near the end of these sessions, union negotiators agreed to present to union members a set of modifications affecting lunch periods, booking and check-out time, driver rotation rules, holidays, vacation days, sick days, fringe benefit contributions, supplemental unemрloyment compensation, and supplemental disability insurance. Jt.App. 169, 556-61, 564-69. Those concessions, if approved and implemented, would have yielded approximately $750,000 in yearly savings. Jt.App. 557.
On March 27th, however, management added to this proposed modification several additional terms, and described the resultant package as its final offer. In essence, this last set of modifications would have extended the expiration date of the contract for an additional two years, with wages and fringe benefits frozen at the proposed levels until April 1,1987. At that time, a “reopener” provision would permit the union to bargain for increased wages and benefits during the final year of the extended contract. The union requested that there be binding arbitration if reopen-er negotiations proved unsuccessful, but management rejected this demand. Jt. App. 557-58.
This final offer was submitted to the bargaining unit employees on March 29, 1985 and rejected by an 82-7 vote. According to Local 807’s business agent, the union members were particularly adamant about *86 not accepting the two-year contract extension and the freeze on wages and benefits. Jt.App. 710-11.
Carey filed its Chapter 11 petition with the Bankruptcy Court on April 4, 1985, and one day later, delivered to Local 807 a proposal to modify its collective bargaining agreements pursuant to 11 U.S.C. § 1113(b)(1)(A). This post-petition proposal was designed to achieve annual savings of $1.8 million for each of the next three fiscal years. Jt.App. 117.
Carey planned to achieve savings of this magnitude by (1) freezing all wages for second-tier drivers and reducing wages for first-tier drivers (those on the payroll prior to July 1, 1984) by $1.00 per hour; (2) reducing health and pension benefit contributions by approximately $1.50 per hour; (3) replacing daily overtime with weekly overtime; (4) eliminating all sick days and reducing the number of paid holidays; (5) eliminating supplemental workers’ compensation and supplemental disability payments; (6) eliminating premium payments and reducing commissions paid to charter drivers; and (7) changing numerous scheduling and assignment rules. All terms were to be frozen for three years under this post-petition proposal.
When Carey presented this proposal to Local 807, company officers were projecting fiscal year 1986 losses of approximately $950,000. (Carey revised this estimate shortly thereafter, projecting losses of $746,000. Jt.App. 39.) In a cover letter accompanying this proposal, Carey asserted that it needed to slash costs by considerably more than its projected losses in order to improve its long-term financial health by updating and expanding its bus fleet, operations, and maintenance facilities. Without savings of this magnitude, Carey explained, it would be unable to propose a feasible reorganization plan to creditors and resolvе its indebtedness to them. Carey requested a meeting with Local 807 representatives “to discuss the proposals and to attempt to reach mutually satisfactory modifications of the agreement[s].” Jt.App. 118.
Shortly after the Company submitted its post-petition proposal, dissension within Local 807 became obvious; in fact, virtually all union members formed a “Drivers Committee” and hired an attorney to represent them separately from Local 807 officials. The Drivers Committee then refused to participate in most post-petition negotiations, despite union officials’ pleas that they reconsider that decision to “stonewall” these sessions. Jt.App. 138-39, 702-03.
In the meantime, Carey filed its section 1113 application to reject its bargaining agreements. The Bankruptcy Court scheduled and conducted five days of hearings on Carey’s application, urging the parties to continue negotiations at the same time. After the third day of hearings, a Local 807 officer presented to Carey a counter-proposal designed to achieve annual cost savings of $776,000. The counter-proposal would have extended the expiration date of the existing agreements by fifteen months, and frozen wages and benefits except for a reopener, with binding arbitration, scheduled for June 24, 1986. Jt.App. 191-93, 671-87. Carey found the counter-proposal unacceptable, and the hearings continued.
The central issues at the hearing, as on this appeal, were whether the post-petition proposal contained only necessary modifications of the existing agreements, see 11 U.S.C. § 1113(b)(1)(A), whether that proposal treated all parties fairly and equitably, see id., whether Local 807 lacked good cause for rejecting that proposal, see § 1113(c)(2), and whether the balancing of the equities clearly favored rejection of the bargaining agreements, see § 1113(c)(3).
On June 14, 1985, the bankruptcy court issued its decision approving Carey’s application to reject the collective bargaining agreements. Bankruptcy Judge Lifland adopted, with certain modifications, a nine-step analysis of § 1113 first used in
In re American Provision Co.,
On appeal, the United States District Court for the Southern District of New York affirmed on the opinion below, in an Order dated August 14, 1986. The Union filed a timely notice of appeal on September 12, 1986.
DISCUSSION
Congress enacted section 1113 of the Bankruptcy Code, 11 U.S.C. § 1113,
1
in response to
NLRB v. Bildisco & Bildisco,
Bildisco
involved two key holdings. The first involved the proper substantive standard to be used by bankruptcy courts asked to approve rejections of collective bargaining agreements, while the second involved the procedural prerequisites to rejection. In defining the substantive standard, the Supreme Court declined to adopt this court’s previous rule that rejection could be approved only after a finding that adherence to the agreement would “thwart efforts to save a failing [company] in bankruptcy from collapse.”
Brotherhood of Railway, Airline & Steamship Clerks v. REA Express, Inc.,
On the procedural question, the
Bildisco
Court held that a reorganizing debtor did not have to engage in colleсtive bargaining before modifying or rejecting provisions of the agreement, and that such unilateral alterations by a debtor would not violate either section 8(a)(5) or section 8(d) of the National Labor Relations Act, 29 U.S.C. §§ 158(a)(5), (d).
See
Before addressing the question of whether Carey has proven its compliance with the requirements of the new statute, we must considеr a preliminary issue raised by appellants.
*88 I. Standard of Appellate Review
Local 807 argues that the bankruptcy-court’s findings of procedural and substantive compliance with Section 1113 involve mixed questions of law and fact. Therefore, appellant insists, those findings are subject to de novo review by the district and circuit courts. We disagree.
The bankruptcy court’s interpretation of the statute, specifically its reading of what the debtor must prove before the court may approve rejection, does constitute a conclusion of law subject to plenary review.
See In re Tesmetges,
II. Merits of the Decision Below
In
Century Brass,
Briefly stated, the statute permits the bankruptcy court to approve a rejection application only if the debtor, besides following the procedures set forth by Congress, makes three substantive showings. The first is that its post-petition proposal for modifications satisfies § 1113(b)(1), which in turn limits the debtor to proposing only “those necessary modifications in ... benefits and protections that are necessary to permit the reorganization of the debtor,” and obliges the debtor to assure the court that “all creditors, the debtor and all affected parties are treated fairly and equitably.” Second, the debtor must show that the union has rejected this proposal without good cause. Bankr.Code § 1113(c)(2). Third, the debtor must prove that “the balance of the equities clearly favors rejection of [the bargaining] agreement.” Code § 1113(c)(3). The first two statutory requirements go beyond the substantive test adopted by the
Bildisco
Court, but the third requirement represents a codification of the equitable test adopted in
Bildisco. See Century Brass,
We reaffirm and, where necessary, explicate the Century Brass panel’s discussion of section 1113’s substantive requirements. We affirm the decision below because it substantially comports with our reading of the statute, and because Judge Lifland’s factual findings are not clearly erroneоus.
1. Compliance with § 1113(b)(1)
(a) Necessity of the modifications
As the
Century Brass
panel noted, this provision “emphasizes the requirement of the debtor’s good faith in seeking to modify its existing labor contract.”
In answer to the first of these questions, the Third Circuit concluded that “necessary” as used in subsection (b)(1)(A) is synonymous with “essential” in subsection (e), which authorizes the court to approve certain non-negotiated interim changеs while the rejection application is pending. Thus, the court held, necessity must “be construed strictly to signify only modifications that the trustee is constrained to accept.”
Wheeling-Pittsburgh Steel,
Local 807 asks us to adopt the Third Circuit’s reasoning, arguing that the post-petition proposal must fail because it sought more than break-even cost reductions, because the proposed three year term was too long in relation to the eight months remaining under the existing agreement, and because it did not provide for wages and benefits to “snap-back” in the event that Carey’s financial performance improved.
See Wheeling-Pittsburgh Steel,
First of all, the legislative history strongly suggests that “necessary” should not be equated with “essential” or bare minimum. Although the Third Circuit may be correct that the “necessary” language was viewed as a victory for organized labor because it approximated the “minimum modifications” language urged by Senator Packwood, see id. at 1088, Congress obviously did not adopt Senator Packwood’s proposal. Instead, as the Wheeling-Pittsburgh Steel panel acknowledged, Congress settled on “a substitute for this clause.” Id. at 1087. Congress’ ultimate choice of this substitute clause suggests that it was uncomfortable with language suggesting that а debtor must prove that its initial post-petition proposal contained only bare-minimum changes.
Judge Lifland, in the decision below, properly pointed out a second reason for not reading “necessary” as the equivalent of “essential” or bare minimum. Because 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.
See
The Third Circuit’s answer to the “necessary to what” question is also troubling. In our view, the
Wheeling-Pittsburgh
court did not adequately consider the significant differences between interim relief requests 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). In the interim relief context, therefore, it is only proper that the court focus on the bare minimum requirements for short-term survival.
Royal Composing Room,
Moreover, the length of Carey’s proposal and the absence of a snap-back provision likewise did not require rejection of the proposal. While the Third Circuit relied on a similar argument in finding a proposed modification not “necessary” for purposes of section 1118,
Wheeling-Pittsburgh,
In sum, we conclude that the necessity requirement 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. Although Judge Lifland did not incorporate each of these factors into his discussion of necessity,
see
Each of the findings pertinent to this inquiry, moreover, is supported by substantial evidence in the record. For instance, 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.
(b) Fairness as to all parties
The requirement that the debtor assure the court that “all creditors, the debtor and all affected parties are treated fairly and equitably,” Code § 1113(b)(1)(A), is a relatively straightforward one. The purpose of this provision, according to
Century Brass,
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 *91 standards, it is not unfair or inequitable to exempt the other employees from pay and benefit reductions.
Local 807 has consistently argued that Carey’s managers and supervisors are more than adequately compensated, that Local 807 members are not paid substantially more than their counterparts working for Carey’s competitors, and that non-union staffing levels have increased rather than decreased since Schiavone purchased Carey. But substantial record evidence supports each of the bankruptcy court’s contrary conclusions. For instance, the record contains unrebutted testimony that Carey drivers' hourly wages and benefits exceeded those paid by other private carriers by several dollars per hour, Jt.App. 418-20 (discussing comparison chart in Debtor’s Exhibit A), while managers’ and supervisors’ compensation packages were described as “barely competitive.” Id. at 489-92. Carey also, offered evidence of pre-petition reductions in its managerial staff (from twenty-four to fifteen people) and its non-union supervisory staff (from fifteen to twelve), achieved by increasing the remaining officials' responsibilities. Id. at 474-78. In light of this record evidence, we cannot disturb the bankruptcy court's findings on this score.
The lower court also correctly looked to pre-petition concessions obtained from the mechanics’ union and two of Carey’s principal creditors — the MTA and the Port Authority — 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.
See In re Kentucky Truck Sales,
Finally, we note that even if a greater sacrifice is required of an owner-creditor than of other creditors, a write-off of outstanding debts is not the only way a creditor can assist its debtor. Here the record shows that Schiavone did not charge any interest on its loans to Carey, Jt.App. 243-44, and that Schiavone otherwise subsidized Carey’s day-to-day operations. By doing so, Schiavone made sacrifices that contributed significantly to Carey’s survival.
In light of this evidence, we affirm the bankruptcy court’s ruling that all parties were participating “fairly and equitably” in the attempt to save Carey from liquidation.
2. Good Cause
The debtor’s obligation to prove that the union lacked goоd cause for refusing the post-petition proposal, like the necessity question, has been the subject of some debate among commentators and the
*92
courts. The bankruptcy court here reasoned that because the proposed modifications were necessary, fair, and equitable, the union’s refusal to accept them was without good cause.
We conclude, nonetheless, that this analysis is proper where, as here, the union has neither participated meaningfully in post-petition negotiations nor offered any reason for rejеcting the proposal other than its view that the proposed modifications were excessive. At least one commentator has noted that the statute appears to authorize conduct similar to what the Drivers Committee did here: “stonewalling” post-petition negotiations and hoping that the courts will find that the proposal does not comply with subsection (b)(1).
See id.
at 341,
discussed in Royal Composing Room,
Thus, even though the debtor retains the ultimate burden of persuаding 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 prehear-ing, 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(e)(2).” Id. at 407. We agree with the bankruptcy court that because the union engaged in such prehearing stonewalling here, it now cannot claim that it had good cause for refusing the proposal.
Local 807 insists that because it later counter-proрosed modifications that would have yielded significant cost savings, it had good cause for rejecting the debtor’s proposal. We find, however, that ample record evidence supports the bankruptcy court’s conclusion that this counter-proposal did not have the backing of union members.
3. Balancing the Equities
This requirement, as we noted in
Century Brass,
is a codification of the
Bildisco
standard.
See
The lower court’s decision, for the most part, is consistent with still-vital case law applying this equitable balancing test. From
Bildisco
and the cases consistent with its analysis, we glean at least six permissible equitable considerations, many of which also factor into the other substantive requirements imposed by section 1113. Those are (1) the likelihood and consequences of liquidation if rejection is not рermitted; (2) the likely reduction in the value of creditors’ claims if the bargaining agreement remains in force; (3) the likelihood and consequences of a strike if the bargaining agreement is voided; (4) the possibility and likely effect of any employee claims for breach of contract if rejection is approved; (5) the cost-spreading abilities of the various parties, taking into account the number of employees covered by the bargaining agreement and how various employees’ wages and benefits compare 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.
See, e.g., Bildisco,
Substantial record evidence supports the lower court’s other findings pertinent to this inquiry, despite the union’s continued insistence that such support is lacking. For instance, documentary evidence in the record is consistent with the district court’s findings that unionized labor costs were approximately 60% above the industry average, that 66% of Carey’s employees are unionized, that managers, supervisors, and non-union workers were receiving less than average compensation while taking on increased workloads, and that Local 807, therefore, could fairly be expected to bear a substantial proportion of the needed cost-cutting measures. Record evidence also clearly shows that increasing losses in previous years, and continued but decreased projected losses in the then-current year, made liquidation a very real threat. The Union has not attempted to refute the evidence indicating that the company’s low asset value, the secured creditors’ existing claims, and the anticipated costs of administration and liquidation, would leave little or nothing for unsecured creditors and shareholders if the liquidation threat materialized. In view of this substantial and largely unrebutted evidence, we concur in the bankruptcy court’s conclusion that the equities clearly favored rejection of the Local 807 agreements.
CONCLUSION
For these reasоns, we affirm the judgment of the district court upholding the bankruptcy court’s approval of Carey's section 1113 application to reject its bargaining agreements with Local 807.
Notes
. Section 1113 provides in pertinent part:
(b)(1) Subsequent to filing a petition and prior to filing an application seeking rejection of a collective bargaining agreement, the debtor in possession or trustee (hereinafter in this section 'trustee' shall include a debtor in possession), shall—
(A) make a proposal to the authorized representative of the employees covered by such agreement, based on the most complete and reliable information available at the time of such proposal, which provides for those necessary modifications in the employees benefits and protection 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. ...
(c) The court shall approve an application for rejection of a collective bargaining agreement only if the court finds that—
(1) the trustee 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.
11 U.S.C. § 1113(b), (c).