9.13.2006

Tenth Circuit Sides With Majority on Split Re Interpretation of Section 1113 of the Bankruptcy Code

Per Peters v. Pikes Peak Musicians Ass’n, --- F.3d ---, 2006 WL 2522471 (10th Cir. Sept. 1, 2006):

Section 1113 was added to the Bankruptcy Code in 1984 in response to the Supreme Court's decision in NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1984). In Bildisco, the Court held that a debtor could avoid the legal obligation "to comply with the terms of a collective bargaining agreement subsequent to the [petition] filing date but prior to a determination regarding formal rejection of the agreement by the bankruptcy court." [T]he effect of this decision was to provide incentives for companies to threaten bankruptcy as leverage in labor contract negotiations. See In re Certified Air Techs., Inc., 300 B.R. 355, 361 (Bankr.C.D.Cal.2003). Congress enacted § 1113 to remove this incentive by prohibiting the debtor-in-possession or trustee from making unilateral changes to the terms or conditions of a collective bargaining agreement during reorganization. See In re FBI Distrib. Corp., 330 F.3d 36, 44 (1st Cir.2003). Instead, § 1113 required them to obtain court approval before taking any action on a prior agreement. . .
Since the enactment of § 1113, courts have struggled to determine whether this provision lessens the burden for achieving administrative expense priority under § 503 and § 507 when claims arise out of collective bargaining agreements. The circuits have split on the issue.
The minority approach is represented by the Sixth Circuit in In re Unimet Corp., 842 F.2d 879 (6th Cir.1988). In that case, the United Steelworkers of America sought payment of insurance premiums under a collective bargaining agreement for their members, who were retirees of the bankrupt Unimet Corporation. The court held that the remedial purpose of § 1113 trumped the literal language of § 503, thus entitling parties to administrative expense priority under § 507 for claims filed pursuant to collective bargaining agreements, even where the requirements of § 503 had not been satisfied.

A number of district courts following Unimet have concluded that virtually any claim under a collective bargaining agreement is entitled to a "superpriority" or automatic priority status because of § 1113. See, e.g., In re Arlene's Sportswear, Inc., 140 B.R. 25 (Bankr.D.Mass.1992) . . . The rationale is that such an interpretation is necessary to give teeth to the protections against unilateral employer action created by § 1113. If an employer remains technically bound to a collective bargaining agreement during the post-petition period but employees are unable to recover for claims under the agreement, the added protections of this provision are illusory. See Unimet, 842 F.2d at 885-86.

The majority of courts, however, have taken a contrary approach, first articulated by the Third Circuit in In re Roth American, Inc ., 975 F.2d 949 (3d Cir.1992). There, the bankrupt company had a collective bargaining agreement with its employees, who were represented by the local Teamsters union. After the company filed for Chapter 11 reorganization and ultimately ceased operations, the union sought vacation and severance pay earned both before and after filing for bankruptcy. Applying the literal language of § 503(b)(1)(A), the court held that services have to be "rendered after the commencement of the case" in order to qualify for payment as administrative expense claims. In that case then, the benefits that accrued based on services performed after the filing of the petition were given priority as § 503 administrative expenses, but the benefits that accrued beforehand were not.The court declined the opportunity to alter its analysis based on § 1113 because "no language in section 1113 addresse[d] the priority to be accorded [such] claims." Id. at 956. To bolster its interpretation of the text, the Roth court contrasted § 1113 with the immediately succeeding provision, § 1114. Whereas § 1113 creates protections for collective bargaining agreement claims, § 1114 creates protections for retiree benefit claims. Notably, however, where § 1113 is silent about the priority to be accorded such claims, § 1114 specifically provides that "[a]ny payment for retiree benefits ... has the status of an allowed administrative expense as provided in section 503 of this title." 11 U.S.C. § 1114(e)(2). Thus, the court concluded, if Congress had wished to create an automatic priority for collective bargaining agreement claims, it would have been similarly explicit in § 1113. Conversely, its failure to do so should counsel against a court's attempts to read such requirements into the statute. See Roth, 975 F.2d at 956. [See also In re Inosphere Clubs, Inc., 22 F.3d 403, 407 (2d Cir.1994) (holding pre-petition claims, even under a collective bargaining agreement, are not administrative expenses under § 507(a)(1); Adventure Res., Inc. v. Holland, 137 F.3d 786, 796 (4th Cir.1998) ("It is imperative to the orderly administration of the bankruptcy process that § 507 remains, unless otherwise clearly specified by Congress, the final word on the priorities of competing claims.")]

In sum, the majority of cases continue to limit the administrative expense priority provided in § 507 to claims that meet the textual requirements of § 503, even in cases that arise under collective bargaining agreements that implicate § 1113. . . In our view, § 1113 does not trump the priority scheme set forth in § 503 and § 507. Thus, we reject the minority position on this issue.

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