In Re Mile Hi Metal Systems, Inc., Debtor. Sheet Metal Workers' International Association, Local 9 v. Mile Hi Metal Systems, Inc.

899 F.2d 887, 7 Colo. Bankr. Ct. Rep. 81, 22 Collier Bankr. Cas. 2d 611, 133 L.R.R.M. (BNA) 2927, 1990 U.S. App. LEXIS 3978, 20 Bankr. Ct. Dec. (CRR) 505, 1990 WL 28245

• Court: Court of Appeals for the Tenth Circuit
• Decided: March 20, 1990
• Docket: 86-2912
• Status: Published

Opinions

STEPHEN H. ANDERSON, Circuit Judge.

This appeal requires us to interpret for the first time 11 U.S.C. § 1113 (“section 1113”), which sets forth the procedures and conditions under which a debtor-in-possession or trustee may reject a collective bargaining agreement. At the heart of this matter is the requirement in section 1113(b)(1)(A) that the debtor make a proposal which sets out:

“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 Mile Hi’s owners stated that the non-Union replacement workers would be paid “at whatever rate [Mile Hi] could hire them rather than at the contract rate.” R.Yol. IV at 38.

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., 67 B.R. 114, 117 (D.Colo.1986). The court went on to find that the disputed provisions were not “necessary,” as section 1113(b)(1)(A) requires, because they exceeded the absolute minimum needed for Mile Hi’s reorganization. Id. at 118. In addition, the court found that the proposed wage differential would have been an unfair labor practice, and consequently that the proposal did not satisfy the requirement in section 1113(b)(1)(A) of treating the Union “fairly and equitably,” and justified the Union in refusing even to consider it. Id. Our reading of the statute leads us to different conclusions. Accordingly, we reverse the district court, vacate the order of the bankruptcy court, and remand for further proceedings.¹

II. DISCUSSION

Section 1113 was passed in response to the Supreme Court’s decision in NLRB v. Bildisco & Bildisco, 465 U.S. 513, 104 S.Ct. 1188, 79 L.Ed.2d 482 (1984), which permitted a debtor to reject a collective bargaining agreement unilaterally. Congress agreed that a debtor should be able to reject the agreement, but not that it should be able to do so on its own.² 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 ... 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.”

11 U.S.C. § 1113(b)(1)(A), (b)(2), (c).

The legislative history of section 1113, which has been explored in detail elsewhere, see, e.g., In re Royal Composing Room, Inc., 848 F.2d 345, 352-54 (2d Cir. 1988) (Feinberg, C.J., dissenting), cert. denied, — U.S. -, 109 S.Ct. 1529, 103 L.Ed.2d 834 (1989); 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, 311-21 (1984), consists of little more than self-serving statements by opposing partisans. No committee reports were issued on the statute, apparently because no agreement on content could be reached. See In re Carey Transp., Inc., 50 B.R. 203, 206 (Bankr.S.D. N.Y.1985), aff'd sub nom. Truck Drivers Local 807 v. Carey Transp., Inc., 816 F.2d 82 (2d Cir.1987). When legislative history is “scant and capable of differing interpretations,” we are hesitant to consider it “a reliable indicator of [Congressional] intent.” Miller v. Commissioner, 836 F.2d 1274, 1282-83 (10th Cir.1988); see also Garcia v. United States, 469 U.S. 70, 76, 105 S.Ct. 479, 483, 83 L.Ed.2d 472 (1984). We therefore confine our analysis largely to the words of the statute itself, taking into account other judicial interpretations. See In re Landmark Hotel & Casino, Inc., 78 B.R. 575, 583 (Bankr. 9th Cir.1987), appeal dismissed, 872 F.2d 857 (9th Cir.1989); Cosetti & Kirshenbaum, supra note 2, at 193.

A. Effect of Proposals Which Allegedly Violate Labor Law

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 section 1113 itself, which by providing for the rejection of collective bargaining agreements authorizes what would otherwise be a violation of 29 U.S.C. § 158(d). We recognize the strong national policies which protect workers from unfair labor practices and ensure the enforceability of collective bargaining agreements. See 29 U.S.C. § 158; see also International Bhd. of Teamsters v. IML Freight, Inc., 789 F.2d 1460, 1462 (10th Cir.1986). But Chapter 11 of the Bankruptcy Code reflects an equally strong public policy “to prevent a debtor from going into liquidation, with an attendant loss of jobs and possible misuse of economic resources.” NLRB v. Bildisco & Bildisco, 465 U.S. at 528, 104 S.Ct. at 1197.

“[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 11 U.S.C. § 1113, 58 Am.Bankr.L.J. 325, 342 (1984). We hold that a proposal containing modifications which, if implemented, would violate labor law does not per se fail to satisfy subpart (b)(1)(A), and does not relieve the union of its duty to confer in good faith. There may be cases where a necessary proposed modification is fair and equitable to all parties, even though it contravenes labor law.³

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 section 1113 itself. The relief available to the debtor is rejection of an existing collective bargaining agreement, so a proposed modification should not make the debtor better off than it would be without any agreement. That is, proposals which would in and of themselves contravene labor law, even in the absence of a collective bargaining agreement, presumptively will not satisfy section 1113(b)(1)(A).

Section 1113 is intended to operate expeditiously. When the parties are unable to arrive at mutually satisfactory modifications, the bankruptcy court is entitled to use its own rules and procedures in addressing an allegation of illegality. The court should not await resolution of the question by the National Labor Relations Board⁴ or conduct a full-scale trial. The bankruptcy court has no authority to adjudicate unfair labor practice claims.⁵ It should simply take them into account in determining whether the debtor’s proposed modifications satisfy section 1113(b)(1)(A).

Even though the burden of persuasion will rest with the debtor on the substantive requirements of section 1113, the union will bear the burden of production with regard to several of the elements. In re American Provision Co., 44 B.R. 907, 909-10 (Bankr.D.Minn.1984). In particular, the union must come forward with evidence of a proposed modification’s illegality, and the union’s own good cause for rejecting the debtor’s proposal on such grounds, before the burden of showing legality falls on the debtor.

Section 1113(b)(2) states that after the proposal is made, “the [debtor] shall meet, at reasonable times, with the authorized representative to confer in good faith in attempting to reach mutually satisfactory modifications.” We read this to require that both parties confer in good faith. In addition, subpart (c)(2) requires the union to have “good cause” for rejecting the proposal. These two subparts impose an obligation on the union to participate meaningfully in the negotiations and to explain its reasons for opposing the proposal. Truck Drivers Local 807 v. Carey Transp., Inc., 816 F.2d 82, 92 (2d Cir.1987); see In re Sol-Sieff Produce Co., 82 B.R. 787, 795 (Bankr.W.D.Pa.1988). Even if part of a proposal is unacceptable as a perceived unfair labor practice, the union must confer in good faith on the remainder of the proposal, and also must work with the debtor on the allegedly illegal provisions, explaining why the union deems them unlawful and negotiating changes or alternatives which would avoid the illegality.⁶

B. The Requirement that the Modifications Be “Necessary”

Just what Congress meant when it used the word “necessary,” which appears twice in section 1113(b)(1)(A), has been a source of confusion. In ordinary usage, “necessary” means “cannot be done without” or “absolutely required.” ⁷ Relying on Wheeling-Pittsburgh Steel Corp. v. United Steelworkers of America, 791 F.2d 1074, 1088 (3d Cir.1986), the district court held that a proposal which went beyond the bare minimum required for the debtor’s reorganization did not satisfy section 1113(b)(1)(A). However, the majority of cases decided since Wheeling-Pittsburgh have declined to interpret section 1113(b)(1)(A) as requiring that a proposal⁸ be absolutely necessary. See, e.g., Truck Drivers Local 807 v. Carey Transp., Inc., 816 F.2d at 90; In re Big Sky Transp. Co., 104 B.R. 333, 336 (Bankr.D.Mont.1989); In re Texas Sheet Metals, Inc., 90 B.R. 260, 265 (Bankr.S.D.Tex.1988); In re Amherst Sparkle Market, Inc., 75 B.R. 847, 851 (Bankr.N.D.Ohio 1987); In re Walway Co., 69 B.R. 967, 973 (Bankr.E.D.Mich.1987).

We agree with the latter view. The word “necessary” in subsection (b)(1)(A) does not mean absolutely necessary.⁹ In re Allied Delivery System Co., 49 B.R. 700, 702 (Bankr.N.D.Ohio 1985). We hold instead that section 1113(b)(1)(A):

“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., 816 F.2d at 90. The goal to be served by modifying the collective bargaining agreement, and by the entire Chapter 11 proceeding, is not simply a reorganization, but a successful reorganization, i.e., one from which the debtor emerges as an economically viable operation. See, e.g., Truck Drivers Local 807 v. Carey Transp., Inc., 816 F.2d at 89; In re Walway Co., 69 B.R. at 973.

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.¹⁰ See In re William P. Brogna & Co., 64 B.R. 390, 392 (Bankr.E.D.Pa. 1986); In re Valley Kitchens, Inc., 52 B.R. 493, 495-96 (Bankr.S.D.Ohio 1985); Gibson, supra, at 337; West, Life After Bildisco: Section 1113 and the Duty to Bargain in Good Faith, 47 Ohio St.L.J. 65, 112-13 (1986).

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., 67 B.R. at 117; Response Brief of Appellee at 8. It is clear from section 1113, however, that the proposal which the bankruptcy court is to evaluate must be made “prior to” the hearing. 11 U.S.C. § 1113(b)(1), (c)(1).

“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., 62 B.R. 403, 407 (Bankr.S.D.N.Y.1986) (citation omitted), aff'd, 78 B.R. 671 (S.D.N.Y. 1987), aff'd, 848 F.2d 345 (2d Cir.1988), cert. denied, — U.S. -, 109 S.Ct. 1529, 103 L.Ed.2d 834 (1989). Therefore, the wage differential “proposal” was not properly before the court.

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 below, we vacate the judgment of the district court with directions that it vacate the order of the bankruptcy court and remand this case to the bankruptcy court for further consideration of Mile Hi’s application to reject the collective bargaining agreement, and such other and further proceedings as may be appropriate in the circumstances, including the receipt of additional evidence and a further hearing if required. The bankruptcy court need not reopen specific findings and conclusions not affected by this decision.

Judgment VACATED, and the case is REMANDED.

1 . 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, 535 F.2d 496, 498 n. 1 (9th Cir.1976); cf. Rogers v. Fedco Freight Lines, Inc., 564 F.Supp. 1169, 1176 (S.D.Ohio 1983).

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, 714 F.2d 1109, 1110 (11th Cir.1983).

2 . 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., 88 B.R. 314, 316 n. 2 (D.Colo.1987). This is so because, while section 1113 created new procedural requirements, it did not overrule, but in fact codified, Bildisco's substantive standards. See, e.g., In re Fiber Glass Indus., Inc., 49 B.R. 202, 203 (Bankr.N.D.N.Y.1985); 5 Collier on Bankruptcy ¶ 1113.01[i], at 1113-24 (15th ed. 1989); Cosetti & Kirshenbaum, Rejecting Collective Bargaining Agreements Under Section 1113 of the Bankruptcy Code — Judicial Precision or Economic Reality?, 26 Duq.L.Rev. 181, 225 (1987); Note, Collective Bargaining Agreements in Bankruptcy Proceedings: Congressional Response to Bildisco, 1985 U.Ill.L.Rev. 997, 1011-13. As stated by a Tenth Circuit panel of which the author of the concurring opinion was a member, "[w]hile new procedural requirements have been imposed, the approach to the required balancing of the equities should not be different from the instruction provided in Bil-disco.’' International Bhd. of Teamsters v. IML Freight, Inc., 789 F.2d 1460, 1461 (10th Cir. 1986).

3 . 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., 642 F.2d 107, 109 n. 1 (5th Cir. Apr. 1981). Federal courts do not issue advisory opinions. FCC v. Pacifica Found., 438 U.S. 726, 735, 98 S.Ct. 3026, 3033, 57 L.Ed.2d 1073 (1978); Montoya v. Postal Credit Union, 630 F.2d 745, 749 (10th Cir.1980).

4 . 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, 106 B.R. 593 (Bankr.E.D. Mo.1989), applying the Perishable Agricultural Commodities Act, and In re Brown, 106 B.R. 852 (Bankr.E.D.Pa.1989), interpreting the Truth in Lending Act.

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.

5 .The NLRB has exclusive jurisdiction over such matters, even during the reorganization process. NLRB v. Superior Forwarding, Inc., 762 F.2d 695, 698 (8th Cir. 1985); NLRB v. Adams Delivery Serv., 24 B.R. 589, 592 (Bankr. 9th Cir. 1982).

6 .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., 816 F.2d at 85.

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., 62 B.R. 403, 407 (Bankr.S.D.N.Y.1986), aff’d, 78 B.R. 671 (S.D.N.Y.1987), aff’d, 848 F.2d 345 (2d Cir.1988), cert. denied, — U.S. -, 109 S.Ct. 1529, 103 L.Ed.2d 834 (1989), and whether the balance of equities favors rejection of the agreement. In re Royal Composing Room, Inc., 848 F.2d at 349. Other responses may also be available to the bankruptcy court.

7 . Webster’s Third New International Dictionary 1511 (1981). But see McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316, 414, 4 L.Ed. 579 (1819) ("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.”); Black's Law Dictionary 536 (abr. 5th ed. 1983).

8 . This appeal does not present the question of whether section 1113(b)(1)(A) requires that each proposed modification be necessary to the reorganization, or merely that the proposal as a whole be necessary. We note only that the district court appeared to adhere to the former view, see In re Mile Hi Metal Sys., Inc., 67 B.R. at 117, which is clearly the majority rule. See, e.g., Truck Drivers Local 807 v. Carey Transp., Inc., 816 F.2d at 86; In re Valley Kitchens, Inc., 52 B.R. 493, 497 (Bankr.S.D.Ohio 1985); In re Fiber Glass Indus., Inc., 49 B.R. 202, 206 (Bankr.N.D.N.Y.1985). But see In re Royal Composing Room, Inc., 848 F.2d at 349.

9 . 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.

10 . 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, 465 U.S. at 551, 104 S.Ct. at 1209 (Brennan, J., concurring in part and dissenting in part); Rosenberg, supra, at 303; Note, Rejection of Collective Bargaining Agreements in Chapter 11 and the Possibility of Strikes: Tipping the Balance of Equities, 15 N.Y. U.Rev.L. & Soc. Change 513, 539-40 (1986-87). It is therefore in the debtor’s best interests to propose only modifications which the union will accept.