UFCW v. Family Snacks ( 2001 )

United States Bankruptcy Appellate Panel
FOR THE EIGHTH CIRCUIT
Nos. 00-6076, 00-6077, and 00-6078
______
In re: *
*
Family Snacks, Inc., *
*
Debtor. *
*
United Food & Commercial * Appeal from the United States
Workers Union, Local 211, * Bankruptcy Court for the
* Western District of Missouri
Appellant, *
*
v. *
*
Family Snacks, Inc. and *
Official Unsecured Creditors’ *
Committee, *
*
Appellees and Cross-Appellants. *
Submitted: November 9, 2000
Filed: January 31, 2001
Before HILL, SCHERMER, and DREHER, Bankruptcy Appellate Panel Judges.
DREHER, Bankruptcy Appellate Panel Judge.
This appeal raises two questions of apparent first impression as to the interpretation of § 1113 of
the Bankruptcy Code. The first is whether a debtor in a Chapter 11 case can reject a collective bargaining
agreement even after it has sold virtually all of its assets. The bankruptcy court held that § 1113 did not
permit rejection following such a sale. The second is whether the court's denial of a debtor's application
for leave to reject its collective bargaining agreement results, ipso facto, in an assumption of such
agreement. The bankruptcy court held that it does not.
The union appeals from the bankruptcy court's ruling on the second issue. Debtor and the Official
Unsecured Creditors' Committee cross-appeal from the bankruptcy court's ruling on the first. We reverse
the bankruptcy court decision regarding rejection and remand for further proceedings in accordance with
this decision. We affirm the bankruptcy court's decision regarding the effect of a denial of an application
for leave to reject.
FACTS and PROCEDURAL HISTORY
Family Snacks, Inc. (“Debtor”) produces and distributes potato chips and other snack foods. On
August 1, 1998, Debtor entered into a collective bargaining agreement ("CBA") with United Food &
Commercial Workers Local 211 ("the union"). The CBA was to remain in effect for five years and
provided that Debtor would pay certain of its union employees' medical and dental expenses. In late 1999
and early 2000, Debtor was in serious financial difficulty and fell behind in its payments of these expenses.
Shortly before filing for bankruptcy, these unpaid employee medical and dental expenses totaled
approximately $491,000.1
On February 14, 2000, Debtor filed a Chapter 11 bankruptcy petition. It was clear from the
beginning that Debtor could not rehabilitate itself. For over six months, Debtor had been attempting to sell
this increasingly financially distressed company, with little success. Matters were so bleak that for a time
1
This number represents an estimate by the union. In addition, on the date of filing, Debtor was
in arrears in paying approximately $600,000 in medical and dental expenses for employees represented
by other unions and for non-union employees. The parties agree that if the union's claim to
administrative expense status for its members' prepetition medical and dental expenses succeeds, the
claims of Debtor's other employees, as well as the claims of all other prepetition unsecured creditors,
will almost certainly receive no distribution at all.
2
the company shut down. Nonetheless, one purchaser was willing to sign a letter of intent to purchase, and
on February 25, 2000, Debtor moved for expedited hearing and bankruptcy court approval to carry out
a sale of virtually all of its assets under § 363 of the Bankruptcy Code. Concurrently therewith, Debtor
moved for an order allowing the purchaser to assume or reject executory contracts and leases, including
the CBA, as selected by the purchaser. The letter of intent specifically required that the assets would be
sold free and clear of certain liabilities, including any arising under union contracts. It was Debtor’s position
that the value of the assets of the company could be maximized only if its assets were sold on a going
concern basis. The bankruptcy court granted expedited hearing and approved a sale pursuant to the letter
of intent and set auction procedures, with the auction to occur on March 13.
The union filed an objection to the sale. It also objected to Debtor's motion to assume or reject
executory contracts. The union argued that a sale free and clear of Debtor's obligations under the CBA
violated § 1113 and that no sale could occur until Debtor had taken steps to bargain with the union. The
union sought to delay the sale until such negotiations could take place or to have payment of unpaid
prepetition employee medical and dental expenses under the CBA made a condition of the sale. In
essence, the union’s position was that, no matter how exigent the circumstances, no sale could take place
before Debtor dealt with the prepetition claims Debtor had incurred under the CBA. Debtor responded
that the court should approve the sale, since failing to do so would dramatically reduce the amount available
to pay creditors.
The first purchaser was unable to arrange financing and withdrew its offer. A new purchaser
stepped in, however. The new Purchase Agreement continued to specifically provide that the assets would
be sold free and clear of Debtor's liabilities under the CBA. On March 22, 2000, over the union's
objections, the bankruptcy court issued its order approving the sale to the new purchaser. The court
declined to condition the sale on the purchaser's assumption of the CBA. No appeal was taken from that
order and the sale closed on March 29, 2000. The next day the purchaser began operations. It did not
assume the CBA. Rather, it hired virtually all union members under terms of a new CBA with the new
3
purchaser that were similar (though not identical) to those in the CBA with Debtor. The purchaser also
paid all employees' postpetition medical and dental claims. Thus, as a result of the sale and the Debtor's
and the purchaser's actions, all postpetition obligations to union members were fully paid. This left the
dispute over the unpaid prepetition medical and dental expenses due under the CBA.
The union had made a motion to have the union employees' prepetition medical and dental expenses
treated as an administrative expense. On April 5, when that motion came on for hearing, the bankruptcy
judge recused himself from deciding it and a second bankruptcy judge stepped in. By way of order dated
April 24, that judge held, without ruling on the merits, that Debtor should be allowed time to negotiate with
the union. On April 13, in accordance with § 1113(b)(1)(A) of the Bankruptcy Code, the Debtor had
already sent a letter to the union in which it purported to modify the CBA by termination. Debtor noted
that, having divested itself of substantially all of its assets, it was not possible to assume the CBA and "thus,
the only modification of the CBA that is viable is the termination of that agreement . . . ." Debtor further
advised that it intended to file a Chapter 11 plan to deal with its remaining assets and liabilities and to make
distributions to creditors in accordance with the priorities established in the Bankruptcy Code. Specifically,
Debtor committed to treat union members' prepetition medical and dental expenses as fourth priority
expenses under § 507(a)(4) in the plan.
The union rejected Debtor's proposal for termination. The parties continued to negotiate, but were
unable to reach an agreement. Thus, on May 1, 2000, Debtor filed an application for leave to reject the
CBA. The Official Unsecured Creditors' Committee joined in the application. The bankruptcy court heard
Debtor's application for leave to reject, along with the union's still pending motion for an order determining
that the unpaid prepetition medical and dental expenses be treated as an administrative expense.
In an order dated June 8, 2000, from which this appeal is taken, the bankruptcy court denied
Debtor's application to reject the CBA. The court reasoned that Debtor could not comply with
§1113(b)(1)(A) by showing that rejection was "necessary to permit the reorganization of the debtor." The
4
court construed this language as requiring a debtor to show both that it was reorganizing "with a view to
the long run success of the debtor's business" and that "it could emerge from its reorganization as an
economically viable operation." While the court appeared to accept the proposition that a debtor who is
selling its assets as a going concern may take advantage of § 1113, the court confined § 1113 to instances
in which the debtor applied for leave to reject under § 1113 before any asset sale:
Since Family Snacks is not reorganizing, and since, in any event, it now has no employees,
rejection of the CBA is not necessary for its reorganization. For this reason, Family
Snacks' motion to reject must be denied.
Debtor and the Official Unsecured Creditors' Committee ("Appellees") cross-appeal from this portion of
the decision.
The bankruptcy court then dealt with the union's arguments that Debtor had impliedly assumed the
contract at the point of sale or, alternatively, that the CBA had been assumed as a matter of law as a result
of the court's ruling on Debtor's application to reject. The court ruled that the first argument, that
assumption occurred at the time of sale, was foreclosed by the March 22 order allowing the sale, from
which no appeal had been taken. The union does not explicitly challenge this portion of the bankruptcy
court's order.2 The union does, however, urge that the bankruptcy court erred when it ruled that denial of
2
The union does make reference to this issue at several points in its appellate briefs but it
nowhere addresses the question of whether the March 22 order created the law of the case on this
specific question. Such passing references without more substantial development and argument do not
bring the issue properly before the appellate court. See, e.g., United States v. Panet-Collazo, 960 F.2d
256, 261 n.3 (1st Cir. 1992) ("It is the 'settled appellate rule that issues adverted to in a perfunctory
manner, unaccompanied by some effort at developed argumentation are deemed waived.'" (quoting
United States v. Zannino, 895 F.2d 1, 17 (1st Cir. 1989), cert. denied, 494 U.S. 1082 (1990));
Larson v. Nutt, 34 F.3d 647, 648 (8th Cir. 1994) ("In any event, Larson's skeletal assertion that 'there
were no circumstantial guarantees of trustworthiness surrounding the making of the statements,' buried
in a brief point discussing the benefits of cross-examination, does not raise the issue on appeal." (citing
United States v. Dubkel, 927 F.2d 955, 956 (7th Cir. 1991)); Branch v. Turner, 37 F.3d 371, 374
(8th Cir. 1994) (citing Laborers' Union of North Am. v. Foster Wheeler Corp., 26 F.3d 375, 398 (3d
Cir. 1994) (passing reference to issue without discussion does not bring issue before court). Thus, we
decline to address this argument. And, while we do not reach the issue because it has been waived on
appeal, we note that the Memorandum Opinion of April 4, 2000, which supported the March 22, 2000
5
an application for rejection did not result, ipso facto, in an assumption of the CBA. Here, the court
reasoned, in part, that whether covered by § 1113 or § 365, a debtor must take some affirmative action
to assume or reject a CBA, and it is only the debtor who can take such action.
In light of its decision that assumption had not yet occurred, the bankruptcy court then determined
that the union's motion to treat the unpaid prepetition medical and dental expenses as an administrative
expense was still not ripe for decision and denied the union's motion for administrative expense treatment
without prejudice.
ISSUES
The parties raise two issues on appeal. First, was the bankruptcy court correct in concluding that
rejection was not an option once an asset sale had occurred because there was no longer a "reorganization"
to be facilitated by such rejection? The second issue is whether the bankruptcy court correctly held that
no assumption occurred ipso facto as a result of the court's order denying Debtor's motion to reject.
STANDARD OF REVIEW
The appellate court reviews a bankruptcy court’s conclusions of law de novo and its findings of
fact for clear error. See Merchants Nat’l Bank of Winona v. Moen (In re Moen), 238 B.R. 785, 790
(B.A.P. 8th Cir. 1999); Bachman v. Laughlin (In re McKeeman), 236 B.R. 667, 670 (B.A.P. 8th Cir.
1999). This case involves review of the bankruptcy court’s conclusions of law–the interpretation of §1113.
See Truck Drivers Local 807 v. Carey Transp. Inc., 816 F.2d 82, 88 (2d Cir. 1987) (“The bankruptcy
court’s interpretation of the statute [11 U.S.C. § 1113], specifically its reading of what the debtor must
order, referenced "the union's premise . . . that a sale of substantially all of the debtor's assets as a going
concern to an entity who does not intend to honor the CBA constitutes a de facto rejection of the
CBA and, therefore, the requirements of section 1113 must be met before a sale under those terms can
be permitted." In allowing the sale, the court thus appeared to have rejected this argument.
6
prove before the court may approve rejection, does constitute a conclusion of law subject to plenary
review.”). Therefore, this court will review the bankruptcy court’s decision de novo.
DISCUSSION
A. Rejection Following an Asset Sale
We first address Appellees' contention that the bankruptcy court erred in its ruling that, as a matter
of law, once the asset sale occurred, Debtor could not commence the process of rejection under § 1113.
The court reasoned that § 1113 restricts a debtor to modifications that are necessary to the reorganization
of the debtor and proposals must be made with a view towards the long term continuation of the business.
Because Debtor had closed its doors, the court held it could not meet this threshold requirement. Because
Debtor had already sold its assets, it also could not establish that rejection was necessary to facilitate the
sale of the business on a going concern basis. Thus, in a liquidating Chapter 11 case, the court found,
rejection is not an available alternative unless a debtor complies with § 1113 before it accomplishes a sale
of all its assets. We find this reading of the statutory language too narrow, and we reverse.
Generally speaking, § 1113 governs the rejection or modification of a CBA by a Chapter 11
trustee or debtor-in-possession. See 11 U.S.C. § 1113(a) (1994) (“The debtor in possession, or the
trustee ... may assume or reject a collective bargaining agreement only in accordance with the provisions
of this section.”). This section has its roots in the Supreme Court's decision in NLRB v. Bildisco &
Bildisco, 465 U.S. 513 (1984). In Bildisco, the Supreme Court held that a debtor's CBA was an
executory contract which could be rejected under § 365 of the Bankruptcy Code so long as it appeared
that rejection was necessary to the debtor's reorganization and the equities favored such rejection. See
Bildisco, 465 U.S. at 526-27. The Bildisco Court also ruled that the debtor would have to establish that
it had made efforts to negotiate with the union prior to attempting to reject the CBA. See id. at 526. This
portion of the court's decision was noncontroversial. The second portion of the opinion was, however, very
7
controversial. The Court held that a debtor could unilaterally reject a CBA without court approval and not
commit an unfair labor practice under § (8)(d) of the NLRA.3 See id. at 523-27. Congress swiftly
responded to this second portion of the decision by enacting § 1113 of the Bankruptcy Code. See Collier
on Bankruptcy ¶ 1113.01 (Lawrence P. King ed., 15th rev. ed. 1999). With § 1113, Congress clearly
manifested its intent that CBAs be treated differently than other executory contracts with respect to
rejection. Section 1113 specifically sets forth the standards and procedure for rejection of a CBA and
makes clear that a debtor may not unilaterally reject a CBA. Given this legislative history, it is often said
that § 1113 is designed "to prevent [the debtor] from using bankruptcy as a judicial hammer to break the
union." New York Typographical Union No. 6 v. Maxwell Newspapers, Inc. (In re Maxwell Newspapers,
Inc.), 981 F.2d 85, 89 (2d Cir. 1992). See also Jones Truck Lines, Inc. v. Central States, Southeast &
Southwest Areas Pension Fund (In re Jones Truck Lines, Inc., 130 F.3d 323, 330 (8th Cir. 1997)
(“Section 1113(f) was designed to prevent employers ‘from using bankruptcy as an offensive weapon to
rid themselves of burdensome collective bargaining agreements.’” (quoting In re Ionosphere Clubs, Inc.,
22 F.3d 403, 408 (2d Cir. 1994)).
Section 1113 contains detailed substantive and procedural requirements with which a debtor must
comply to modify or reject a CBA. Specifically, § 1113(c)(1) provides the criteria a court must use in
evaluating the debtor-in-possession’s application to reject a CBA:
(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(c) (1994) (emphasis added). Section 1113(b)(1), which is cross- referenced in
Subsection (c)(1), sets out the requirements for making a valid proposal to modify:
3
Section 8(d) of the NLRA, 29 U.S.C. § 158(d) (1994), prohibits either party to a labor
contract from unilaterally changing its terms and conditions during the life of the agreement.
8
(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 . . . 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 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; and
(B) provide . . . the representative of the employees with such relevant information as is
necessary to evaluate the proposal.
11 U.S.C. § 1113(b)(1) (1994) (emphasis added). Nowhere in § 1113 is there any indication as to when
a debtor must take action to reject a CBA. Timing is addressed, however, in Subsection (b)(2) which
requires the trustee or debtor-in-possession to meet with the union representative and "confer in good faith
in attempting to reach mutually satisfactory modifications" of the CBA between the time the debtor makes
the proposal and the hearing date. 11 U.S.C. § 1113(b)(2) (1994). Subsection (d) further enumerates
timing requirements once such an application is made, providing that a hearing shall be held within fourteen
days of the filing of the application and that the bankruptcy court must rule on an application for rejection
within thirty days after the hearing. See 11 U.S.C. § 1113(d)(1)-(2) (1994). Subsection (e) allows for
interim modifications by court order where "essential to the continuation of the debtor's business, or in order
to avoid irreparable damage to the estate . . . ." 11 U.S.C. § 1113(e). And Subsection (f), specifically
overruling the controversial portion of Bildisco, provides: "No provision of this title shall be construed to
permit a trustee to unilaterally eliminate or alter any provision of a collective bargaining agreement prior to
compliance with the provisions of this section." 11 U.S.C. § 1113(f) (1994).
Section 1113 is certainly "not a masterpiece of draftsmanship." In re American Provision, 44 B.R.
907, 909 (Bankr. D. Minn. 1984). Courts and scholars alike have commented extensively on how poorly-
drafted this statutory provision is. See, e.g., In re Mile Hi Metal Sys., Inc., 899 F.2d 887, 890 (10th Cir.
1990); BirminghamMusicians’ Protective Ass’n v. Alabama Symphony Ass’n (In re Alabama Symphony
Ass’n), 211 B.R. 65, 69 (D.N.D. Ala. 1996) (“The drafters of § 1113, however, were not as clear as they
might have been, and the interpretation of the law has not been consistent among the courts that have
9
examined the section.” (internal footnote omitted)); In re Moline Corp., 144 B.R. 75, 78 (Bankr. N.D. Ill.
1992) (noting that Congress’ drafting failed to make clear § 1113's relationship to other provisions of the
Bankruptcy Code); David Keating,The Continuing Puzzle of Collective Bargaining Agreements
in Bankruptcy, 35 WM. & MARY L. REV. 503, 505 (1994) [hereinafter Keating] (“After nearly a
decade and dozens of cases, the debate concerning section 1113 is far from settled. Neither the courts
nor scholars can agree about what Congress intended to accomplish with section 1113. Similarly, courts
still have not arrived at a consensus concerning how they ought to interpret that section’s nebulous
standards for allowing a Chapter 11 company’s rejection of a collective bargaining agreement.”); Mitchell
Rait, Rejection of Collective Bargaining Agreements Under Section 1113 of the Bankruptcy
Code: The Second Circuit Enters the Arena, 63 AM. BANKR. L.J. 355, 357 (Fall 1989) [hereinafter
Rait]. In addition, Congress provided courts with no meaningful legislative history to decipher and clarify
Congressional intent or to interpret and apply the statute’s substantive, often ambiguous, terms. See
generally United Food & Commercial Workers Union, Local 770 v. Official Unsecured Creditors’
Commit. (In re Hoffman Bros. Packing Co., Inc.), 173 B.R. 177, 182 (B.A.P. 9th Cir. 1994) (“[Enactment
of § 1113 in response to Bildisco] was not a tidy process. Passage of § 1113 was not accompanied by
a committee report, and there is no dependable legislative history.”); Collier on Bankruptcy ¶ 1113.LH
(Lawrence P. King ed., 15th rev. ed. 1999) (noting absence of co-sponsor statements and committee
reports on § 1113); In re Mile Hi Metal Sys., Inc., 899 F.2d at 890 (“When legislative history is scant and
capable of differing interpretations, we are hesitant to consider it a reliable indicator of [Congressional]
intent.” (internal citations omitted) (alterations in original)); Rait, Rejection of Collective Bargaining
Agreements, 63 AM. BANKR. L.J. at 356 (commenting that because “legislative history is sparse and
provides no guidance in interpreting the provisions,” courts have been left to ferret out § 1113's meaning
and reached widely divergent results in doing so).
As a consequence, courts differ in their application and interpretation of § 1113. They do,
however, seem to agree that an application to reject a CBA under § 1113 is judged against a nine factor
test first articulated in In re American Provision Co., 44 B.R. 907, 909 (Bankr. D. Minn. 1984). See
10
generally Keating, 35 WM. & MARY L. REV. at 511-12 (“Virtually every court that is faced with the issue
of whether a Chapter 11 debtor may reject its collective bargaining agreement utilizes a nine-part test that
was first set down by the bankruptcy court in In re American Provision Co.”). Under § 1113(b), the
American Provision test requires that: (1) the debtor make a proposal to modify the CBA; (2) the proposal
be based on the most complete and reliable information available at the time of the proposal; (3) the
proposed modifications are necessary to permit reorganization of the debtor; (4) the modifications assure
that all creditors, the debtor, and all other affected parties are treated fairly and equitably; (5) the debtor
provides to the union such relevant information as is necessary to evaluate the proposal; (6) the debtor
meets at reasonable times with the union between the time of the proposal and the time of the hearing on
the proposal; (7) the debtor negotiates with the union in good faith at these meetings; (8) the union refuses
to accept the debtor’s proposal without good cause; and (9) the balance of equities clearly favors rejection
of the agreement. See American Provision, 44 B.R. at 909. In terms of burdens, the “debtor bears the
burden of persuasion by the preponderance of the evidence on all nine elements,” although “assignment of
the initial burden of production depends on the circumstances.” Id.
The third factor, "necessary to permit the reorganization of the debtor," which was central to the
bankruptcy court's decision, has been at the root of numerous disputes as to interpretation. The primary
dispute arises in the context of how to interpret the word "necessary." Basically, courts differ as to whether
“necessary” is synonymous with “essential” or has a more flexible meaning.
On the one side is the Third Circuit and its decision in Wheeling-Pittsburgh Steel Corp. v. United
Steel Workers of America, 791 F.2d 1074 (3d Cir. 1986). There, the court defined “necessary” as
synonymous with “essential.” Id. at 1088-94. See also In re Royal Composing Room, Inc., 62 B.R. 403,
417-18 (Bankr. S.D.N.Y. 1986) (discussing Third Circuit’s strict “necessary” standard); In re Pierce
Terminal Warehouse, Inc., 133 B.R. 639, 646-47 (Bankr. N.D. Iowa 1991) (adopting strict construction
of “necessary to permit reorganization”). Interpreting “necessary” strictly, the Third Circuit “claimed that
Congress intended the word ‘necessary’ to focus on the somewhat shorter-term goal of preventing the
11
debtor’s liquidation rather than on the far-sighted goal of ensuring a long-term reorganization.” Keating,
35 WM. & MARY L. REV. at 527 (citing Wheeling-Pittsburgh, 791 F.2d at 1089).
On the other side is the Second Circuit and its decision in Truck Drivers Local 807 v. Carey
Transportation, Inc., 816 F.2d 82 (2d Cir. 1987). There, the Second Circuit defined “necessary” more
broadly. See id. at 90. Rejecting the Third Circuit’s strict interpretation, the Second Circuit concluded
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.” Id. Thus, this more flexible Carey standard “focuse[s]
on changes that w[ill] ensure the long-term health of the debtor rather than on changes that would simply
stave off a liquidation in the short term.” Keating, 35 WM. & MARY L. REV. at 527-28. See also United
Food and Commercial Workers Union, Local 328 v. Almac's, Inc., 90 F.3d 1, 5, 6 (1st Cir. 1996)
(differentiating between the standard for interim changes in § 1113(e) and rejection in § 1113(b) and
pointing out that the latter involves substantive "modifications proposed with a view to the long-run success
of the debtor's business"). This more flexible standard is often paired with the requirement of §1129(a)(11)
that a plan of reorganization be confirmed only if confirmation is not likely to be followed by the liquidation
of, or the need for further financial reorganization of, the debtor. See 11 U.S.C. § 1129(a)(11); see also
Almac’s, 90 F.3d at 6.
However, each court that has addressed the meaning of the phrase "reorganization of the debtor,"
as found in § 1113(b)(1)(A), has held or assumed that § 1113 applies in a case where the debtor will not
be engaged in business because it is selling its assets. Initially this might seem questionable since, overall,
the language and scheme of things suggests Congress was concentrating on the classic form of
reorganization where the debtor restructures its debts and continues in business. See In re Ionosphere
Clubs, Inc., 134 B.R. 515, 517 (Bankr. S.D.N.Y. 1991) (discussing problematic application of § 1114's
“necessary to permit the reorganization of the debtor” language to liquidating Chapter 11 cases). But
nonetheless, the courts have applied § 1113 in a liquidation scenario. See In re Maxwell Newspapers,
12
Inc., 981 F.2d at 91 ("The union . . . contends that the debtor has not shown that a collective bargaining
agreement may be rejected to serve the interests of a purchaser of assets. The two lower courts believed
that 11 U.S.C. § 1113 applied to this transaction because what is to emerge, if the sale is consummated,
is the Daily News reorganized as an ongoing business. We agree."); In re Hoffman Bros. Packing, 173
B.R. at 186-87 ("[T]he distinction between reorganization of a debtor and the sale of a going concern asset
to a third party . . . [is] irrelevant to considerations under § 1113, based on Chapter 11's goal of continuing
the enterprise, regardless of the ownership."); In re The Lady H Coal Co., 193 B.R. 233, 240-43 (Bankr.
S.D. W. Va. 1996) (denying a debtor's application for rejection on equitable grounds but assuming that
rejection may occur to facilitate a sale); In re Buhrke Indus., Inc., No. 94-B-1671, 1996 WL 520771, at
*1 (Bankr. N.D. Ill. Sept. 13, 1996) (allowing a debtor to reject a CBA while the debtor was in the
process of liquidation); see also Collier on Bankruptcy ¶ 1113.02[1] (Lawrence P. King ed., 15th rev. ed.
1996) (stating that § 1113 "applies to chapter 11 cases whether the proposed plan is a liquidating one or
not") (citing In re Moline Corp., 144 B.R. 75 (Bankr. N.D. Ill. 1992)).4
The bankruptcy court never reached the question of which standard to apply when deciding
whether rejection was "necessary" because it interpreted "reorganization" narrowly. The court provided
little guidance for its decision, but did reference In re Mile Hi Metal Systems, Inc., 899 F.2d at 893 (placing
on the debtor the burden of proving that it could emerge from its reorganization as an economically viable
operation to permit modification or rejection of the CBA), and Almac's, 90 F.3d at 6 (stating that proposals
to modify or terminate a CBA “must be made with a view to the long run success of the debtor’s
4
The bankruptcy court in In re Ionosphere Clubs, Inc., 134 B.R. 515, 516-17 (Bankr.
S.D.N.Y. 1991), grappled with the application of similar language in § 1114 to a liquidation case. See
11 U.S.C. § 1114(f)(1)(A). There, the court noted that “it is evident from the statute itself that
Congress glossed over the fact that while Chapter 11 cases are usually nonliquidating rehabilitative
reorganizations, this is not always, or necessarily, the case. Where a moribund debtor ... is liquidating
under Chapter 11, ‘necessary to permit the reorganization of the debtor,’ construed literally, does not
provide a meaningful standard for this Court to apply.” Id. at 522. Nonetheless, the court applied §
1114 in a case where the debtor had liquidated.
13
business”).5 Since Debtor had already sold its assets before it sought court approval for its rejection, the
bankruptcy court held that rejection was not an available remedy.
We begin by noting that this precise question, whether a debtor must comply with § 1113 before
it sells its assets, appears to be one of first impression. We find no case directly on point as to this issue of
timing under § 1113.6 The bankruptcy court’s reliance on Almac's and Mile Hi, therefore, was misplaced.
Those cases dealt with the meaning of "necessary," not the meaning of "reorganization of the debtor."
5
The court also cited Carpenters Health & Welfare Trust Funds for California v. Robertson (In
re Rufener Construction, Inc.), 53 F.3d 1064 (9th Cir. 1995) which deals solely with the question of
whether § 1113 is available to a debtor whose Chapter 11 case has been converted to Chapter 7.
6
The courts in two cases assume a debtor may proceed with the requirements of § 1113 for
modification of the CBA post-asset sale. See In re The Lady H Coal Co., Inc., 193 B.R. 233, 240-41
(Bankr. S.D. W. Va. 1996); Tool & Die Makers Local Lodge 113 v. Buhrke Inds., Inc., No. 94-C-
5728, 1996 WL 131698, at *4, *6 n.12 (D.N.D. Ill. 1996). However, neither case addresses the
precise timing issue raised in this case. In Buhrke, for example, over the union’s objection, the debtor
sold the assets of its tool and die division and closed its doors. Buhrke, 1996 WL 131698, at *2. The
debtor proposed a plan of reorganization under which union employees’ unpaid pre-petition vacation
benefits would be treated as third priority allowed unsecured claims under § 507(a)(3)(A). See id. at
**2-3. The union objected, arguing that benefits should be given administrative expense priority and
that the failure to treat them as such constituted a prohibited unilateral modification of the CBA under §
1113(f). The district court rejected the union’s argument. See id. at **4-6. More relevant to the issue
in this case, however, the bankruptcy court below had held that the debtor had not assumed the CBA
when the company’s assets were sold and rejected the union’s argument that once an asset sale had
occurred, rejection of the CBA was not an option. See id. at *7. Finding that the bankruptcy court
failed to address all factors of the American Provision test, the district court never reached this issue but
did not seem bothered by the idea that rejection of the CBA could occur post-sale: “[T]he debtor no
longer employs any members of Local 113, and therefore assumption of the CBA (the logical opposite
of rejection) would serve no business purpose.” Id. at *10 n.11.
Likewise, in Lady H, the debtor sought to reject its CBA and proceed with a sale of
substantially all of its assets free and clear of any interest or liabilities under that CBA. See Lady H,
193 B.R. 236. The court rejected the debtor’s application to reject, finding that the debtor had failed
to comply with some of the American Provision factors. See Lady H, 193 B.R. at 242-43. However,
the court approved the asset sale. See id. at 245. Thus, the court’s decision in Lady H implicitly
suggests that the debtor could satisfy the requirements of § 1113 after an asset sale but prior to
confirmation of a plan. But, as in Buhrke, the Lady H court never explicitly addressed or discussed that
issue.
14
When they used language regarding the long term future of the business, they did so to make clear that they
were not adopting the more narrow, minimally needed to avoid liquidation, test adopted in Wheeling-
Pittsburgh. Neither case involved a debtor who was liquidating.7 For the reasons set forth below, we find
that the court, based on apparent misreading of inapplicable cases, too narrowly read the word
"reorganization" and erred when it equated reorganization as used in § 1113 with rehabilitation of the
debtor.
As a threshold matter, Congress used the word "reorganization," not the more narrow term
"rehabilitation," in § 1113(b)(1)(A). While "reorganization" is not a statutorily defined term, it is generally
understood to include all types of debt adjustment, including a sale of assets, piecemeal or on a going
concern basis, under § 363 followed by a plan of reorganization which distributes the proceeds of the sale
to creditors in accordance with the Bankruptcy Code's priority scheme. See, e.g., 11 U.S.C. §1123(b)(4)
(1994) (stating that a plan may "provide for the sale of all or substantially all of the property of the estate,
and the distribution of the proceeds of such sale among holders of claims or interests"); In re Timbers of
Inwood Forest Assocs., Ltd., 808 F.2d 363, 371 n.14 (5th Cir. 1987) (finding that § 362(d)(2) "necessary
to an effective reorganization" includes liquidation), aff'd, 484 U.S. 365 (1988); In re Bloomingdale
Partners, 155 B.R. 961, 988 (Bankr. N.D. Ill. 1993); In re Independence Village, Inc., 52 B.R. 715, 723
(Bankr. E.D. Mich. 1985); In re W.S. Sheppley & Co., 45 B.R. 473, 480 (Bankr. N.D. Iowa 1984).
Indeed, elsewhere in the Bankruptcy Code, Congress has distinguished the narrower concept of
7
The union refers us to a number of additional cases for the proposition that "reorganization" as
used in § 1113(b)(1)(A) has been interpreted to mean emergence from bankruptcy as a viable, ongoing
enterprise. See Truck Drivers Local 807 v. Carey Transp., Inc., 816 F.2d 82 (2d Cir. 1987); United
Food & Commercial Workers v. Appletree Markets (In re Appletree Markets, Inc.), 155 B.R. 431
(D.S.D. Tex. 1993); In re Valley Steel Prod., Inc., 142 B.R. 337 (Bankr. E.D. Mo. 1992). Again,
these cases are inapposite for they deal with the separate question of the standard to be used when
determining the meaning of the word "necessary" as used in § 1113(b)(1)(A). None of them discusses
the meaning of the word "reorganization" and none was decided in a factual context in which the debtor
was liquidating its assets.
15
rehabilitation from the broader concept of reorganization. See In re Economy Cab & Tool Co., Inc., 44
B.R. 721, 724 n.2 (Bankr. D. Minn. 1984) ("It is well established that the 'rehabilitation' of the second
element under Section 1112(b)(1) means something more than 'reorganization' as 'reorganization' may
include orderly liquidation under control of debtor."); see also 11 U.S.C. § 1113(e) (providing for interim
modification of a CBA "if essential to the continuation of the debtor's business, or in order to avoid
irreparable damage to the estate"); Almac’s, 90 F.3d at 6 ("The scope of 'interim changes' [in § 1113(e)
which speaks of ‘essential to the continuation of the debtor's business’] is more limited than the
modifications 'necessary for reorganization.'").
In addition, we note that the bankruptcy court's conclusion that there is a time limit on when in the
reorganization process a debtor must reject a CBA (i.e., it must be made before rather than after an asset
sale) is not supported by any language found in § 1113. As previously noted, there is nothing in the
language of § 1113 that dictates when an application to reject must be made. See generally In re Moline
Corp., 144 B.R. 75, 77-78 (Bankr. N.D. Ill. 1992). Accordingly, for reasons discussed infra, the timing
of such action is governed, not by § 1113, but by § 365(d)(2), which allows a debtor to defer such a
decision until confirmation of a plan.8 Id.
8
A debtor may not, however, fail to take steps to reject the CBA under § 1113 and, at the
same time, fail to comply with the terms of the CBA. A debtor remains bound by the terms of the CBA
until it takes affirmative steps to reject that agreement. See In re Manor Oak Skilled Nursing Facilities,
201 B.R. 348, 350 (Bankr. W.D.N.Y. 1996) (“[A]ll aspects of a collective bargaining agreement
remain in effect until rejection occurs, including the duty to cure pre-petition arrears or suffer the
consequences. The Debtor here wants both the benefits of rejection (the ability to impair the pre-
petition arrears) and benefits of assumption (labor peace) at the same time. It may not have its cake
and eat it too.” (citing In re Golden Distrib., Ltd., 134 B.R. 760, 762 (Bankr. S.D.N.Y. 1991)). In
addition, a debtor may not unilaterally modify or reject a CBA; rather, under the terms of § 1113, it
must, inter alia, negotiate such modifications with the union representative and ultimately seek court
approval for such modifications. See 11 U.S.C. § 1113(f) (“No provision of this title shall be
construed to permit a trustee to unilaterally terminate or alter any provisions of a collective bargaining
agreement prior to compliance with the provisions of this section.”).
16
Moreover, and most importantly, identical wording in § 1114 of the Bankruptcy Code has been
interpreted to include a situation where the debtor first seeks to reject after it has sold its assets. Section
1114 was enacted in 1988 and deals with retiree benefits, including those found in a union bargaining
agreement. It allows a Chapter 11 debtor to modify retiree benefits under the same test set forth in § 1113:
if "necessary to permit the reorganization of the debtor." 11 U.S.C. § 1114(g)(3) (1994). In In re
Ionosphere Clubs, Inc., 134 B.R. 515, 517 (Bankr. S.D.N.Y. 1991), the bankruptcy court rejected an
argument that "once a company gives up hope of reorganizing as a viable entity, retiree benefits can no
longer be modified." Eastern Airlines was well into a liquidation of all of its assets before it sought to modify
its obligations of providing benefits for retirees. The bankruptcy court reasoned:
If the motion to modify or terminate the benefits is not heard before any possibility of
reorganization is lost, then according to the Retiree Committee, the trustee would be unable
to meet this "necessary to" test and would, thereafter, have forfeited any opportunity to
modify retiree benefits in any way. This Court cannot find that Congress intended such an
anomalous result. Under the circumstances of this case, the only meaningful interpretation
of "necessary to permit the reorganization" that is consistent with fair and equitable
treatment of retirees and all other creditors is one that does not encourage the Trustee or
the Creditors' Committee to seek to convert the case from Chapter 11 to Chapter 7 solely
to preserve the possibility of some recovery for general unsecured creditors. In other
words, in this liquidating case, "necessary to permit the reorganization" must be interpreted
to mean "necessary to accommodate confirmation of a Chapter 11 plan."
Ionosphere, 134 B.R. at 524-25. While Ionosphere deals with a different statutory section, we are
persuaded by these arguments and find them equally applicable to the same wording found in § 1113. See
S. REP. NO. 1119, at 6 (1988), reprinted in 1988 U.S.C.C.A.N. 687-88 ("These standards [§ 1114(e)
and (g)] are intended to be identical to those contained in Section 1113. In adopting this standard the
Committee believes that it is important to use a standard with which the courts are already familiar.");
Ionosphere, 134 B.R. at 519 ("When Congress enacted § 1114 it used the same procedures and standards
as existed for modification or rejection of collective bargaining agreements under § 1113. Compare 11
U.S.C. §§ 1113(b) and (c) with 11 U.S.C. § 1114(e) and (g) respectively.").9
9
The union has suggested that the decision in Maxwell Newspapers overruled Ionosphere.
Compare In re Maxwell Newspapers, Inc., 981 F.2d 85 (2d Cir. 1992), with In re Ionosphere Clubs,
17
The union seeks to confine Ionosphere to its facts, i.e., to a case where the debtor was selling its
assets off piecemeal. When a debtor is selling on a going concern basis, the union urges, Ionosphere should
not apply because the only meaningful time the court can make a decision on rejection is prior to the sale.
We see no basis for such a distinction, unless it is to give the union veto power over a going concern sale
which, as we know from experience, is often the best way to reap the greatest benefit for all creditors.
Section 1113 was never intended to give unions such power. Its sole purpose is to keep a debtor from
unilaterally rejecting a CBA and to plainly articulate the rules for going about rejection. If, as Ionosphere
concluded, a debtor who is liquidating piecemeal should not be forced into Chapter 7 in order to preserve
its assets for equitable distribution to all creditors, the same is true for a debtor who is selling its assets on
a going concern basis.
We further note that there are practical problems with the union's position that negotiations for
rejection must occur before a sale. Many times § 363 asset sales occur on a very expedited basis in
Chapter 11, and, at times, the court authorizes a sale by auction. Purchasers often are willing to purchase
only if the sale can be closed with lightning speed. In an auction setting, for sure, negotiations for rejection
would be virtually impossible. In certain factual settings, the union's position would make it impossible for
a debtor to accept the highest and best offer for its assets and would precipitate the loss of potential
purchasers to the detriment of all other creditors. It is difficult to accept the argument that § 1113 was
designed to give a union the power to so strangle a debtor's attempts to reorganize through liquidation.
Thus, while we find no case directly on point, we conclude that "necessary to permit the
reorganization of the debtor" means necessary to accommodate confirmation of a Chapter 11 plan. We
see no principled reason to limit a debtor's right to reject a CBA to a case where the application to reject
Inc., 134 B.R. 515 (Bankr. S.D.N.Y. 1991). On the contrary, Maxwell Newspapers did not explicitly
or implicitly overrule or limit the Ionosphere decision. The two cases are factually and legally dissimilar.
In addition, in In re Ames Department Stores, Inc., 76 F.3d 66, 68 (2d Cir. 1996), the Second Circuit
cited the Ionosphere decision, specifically Chief Bankruptcy Judge Lifland’s take on courts’ conflicting
interpretations of § 1114, favorably.
18
comes before an asset sale. Certainly, if it is appropriate to permit rejection in the context of a § 363 asset
sale when the debtor will no longer be in business, as the cases uniformly hold and the union appears to
concede, it ought not matter when the decision on rejection is made.
The union's argument-that the asset sale constitutes the debtor’s "reorganization"-too narrowly
reads the language of § 1113(b)(1)(A). The union cites several cases for the proposition that because an
asset sale effectively represents a plan of reorganization, the debtor must satisfy the requirements of § 1113
at the time of or in conjunction with that asset sale. See, e.g., In re Maxwell Newspapers, 981 F.2d at 91;
Hoffman Bros. Packing, 173 B.R. at 186-87; Lady H, 193 B.R. at 240-41. Admittedly, depending on
the facts in a case and the specifics of the arrangement with the prospective purchaser, the asset sale, as
these cases suggest, may represent the appropriate time for the debtor to comply with § 1113's
requirements and seek rejection of the CBA. However, these cases are at odds with the accepted principle
that an asset sale does not always constitute a plan of reorganization and distribution, see Pension Benefit
Guar. Corp. v. Braniff Airways, Inc. (In re Braniff Airways, Inc.), 700 F.2d 935, 940 (5th Cir. 1983), and
none of these cases holds that § 1113's requirements may not be satisfied post-asset sale.
The Debtor was not required to reject the CBA prior to or in conjunction with the asset sale under
§ 1113. That is to say, exactly when a debtor satisfies the “necessary to permit the reorganization” element
does not hinge on the consummation of the asset sale but rather on the confirmation of the actual plan of
reorganization to distribute the proceeds of that asset sale. In this case, at the time the sale closed, Debtor
had not yet proposed its plan of reorganization. Under the terms of the statute, Debtor will still ultimately
have to show that rejection of the CBA is necessary to obtain a confirmable Chapter 11 plan. Because
the Debtor can make that showing before, at, or after the asset sale, and thereby satisfy the requirements
for rejection of the CBA, § 1113 should not be read to preclude the Debtor from doing so after the § 363
asset sale in this case.
19
Finally, we reject the union's contention that our construction of the statute renders meaningless the
protections provided union members in § 1113. According to the union, our construction of §
1113(b)(1)(A) allows a debtor undertaking a going concern sale to ignore its obligations under § 1113 until
after it has sold its assets. We disagree. In order to reject a CBA a debtor must prove that it has met each
of the nine American Provision factors, including specifically that it is acting in good faith and that the
balance of equities favors rejection. See Lady H, 193 B.R. at 242 (denying rejection following sale of
assets upon finding that debtor made no effort to find a buyer who would negotiate with the union,
appeared to have ignored a potential purchaser who was willing to negotiate with the union, and obligated
itself to a "sweetheart" deal for the benefit of insiders). Thus, if a debtor has acted in bad faith in failing to
seek rejection of its CBA before a sale, it will not be able to make a threshold showing necessary to obtain
the right to modify or reject. If, following the sale, the balance of equities does not favor rejection, the
debtor will not be able to reject. But, that does not mean that, as a matter of law, the debtor must apply
for rejection of a CBA prior to a sale of its assets.
Accordingly, we reverse and remand to allow the bankruptcy court to make the findings necessary
to determine whether Debtor is entitled to reject its CBA.10 See Buhrke, 1996 WL 131698, at **9-10
(remanding to bankruptcy court for consideration of American Provision factors); see also In re Buhrke
Indus., Inc., No. 94-B-1671, 1996 WL 520771, at *1 (Bankr. N.D. Ill. 1996) (decision on remand).
10
We reject Appellees' argument that remand is not necessary because the union conceded all
other issues. Appellees point to the transcript of the May 11, 2000 hearing on the Debtor's Application
for Leave to Reject. While the subject was touched upon, there was no unequivocal waiver with
respect to the other eight American Provision factors. In fact, Appellant has provided us with a
memorandum it filed with the bankruptcy court in which it argued that several of the other eight factors
had not been established.
20
B. Automatic Assumption Upon Denial of the Application to Reject
The second issue on appeal, which we also find to be one of apparent first impression,11 is whether
the bankruptcy court correctly held that no assumption occurred automatically upon the bankruptcy court's
denial of Debtor's application to reject. The bankruptcy court rejected the union’s argument that
assumption occurs upon the bankruptcy court’s denial of a debtor’s motion to reject, reasoning that
assumption may not be implied and that, instead, assumption of the CBA by a debtor required affirmative
action by way of a motion seeking assumption. The issue is important because the parties seem to agree
that, if assumption occurred, the union employees' claims for prepetition medical and dental expenses will
be elevated from unsecured prepetition claims, subject at most to fourth priority under § 507(a)(4), to first
priority administrative expenses under §§ 365(b)(1), 365(g)(1), 503(b)(1), and 507(a)(1). In that case,
the Debtor is unlikely to have enough money to pay administrative expenses and will not be able to confirm
a plan. Given the importance of this issue, which may arise once again on remand, we reach it on appeal.
1. Incorporation of § 365 Into § 1113
Section 1113 provides the "debtor in possession, or the trustee . . . may assume or reject a
collective bargaining agreement only in accordance with the provisions of this section." 11 U.S.C.
§1113(a) (1994). The union asserts this plainly means that § 1113 trumps all other Bankruptcy Code
sections with respect to both assumption and rejection and that Congress could have, and indeed would
have, specifically incorporated other Code sections into § 1113 by reference had it wanted them to apply.
However, aside from this single use of the word "assume," § 1113 provides no guidance for what
11
We acknowledge that in Lady H, the court denied the debtor’s application to reject the CBA
and proceeded to grant the union employees’ benefit claims administrative expense status. See Lady
H, 193 B.R. at 249. The court seemed to assume that automatic assumption upon the court’s denial of
the debtor’s application to reject was the correct result, and the parties in that case do not appear to
have argued otherwise. But because the court never addressed this precise issue, we treat it as one of
first impression.
21
procedure is to be used to assume a CBA, nor against what standards a debtor's attempt to assume should
be judged. Rather, § 1113 is entitled "Rejection of Collective Bargaining Agreements" and sets forth
detailed requirements relating solely to a debtor’s rejection action.
We recognize that as a general rule, fundamental rules of statutory construction require us to adhere
to the plain meaning of the statute and give meaning to every word in the statutory provision. See, e.g.,
Negonsott v. Samuels, 507 U.S. 99, 104 (1993); United States v. Ron Pair Enter., Inc., 489 U.S. 235,
243 (1989); Jasa v. Millard Public Sch. Dist. No. 17, 206 F.3d 813, 815 (8th Cir. 2000). Yet, we find
the use of the word "assume" in § 1113, without any additional instruction or reference, far from plain. We
are not alone. See, e.g., Massachusetts Air Conditioning & Heating Corp. v. McCoy, 196 B.R. 659, 662
(D. Mass. 1996) (“I find that the use of the term assumption in § 1113(a) was at most sloppy legislative
drafting.”).
Given the lack of clarity in this specific provision, we must look to other provisions in the
Bankruptcy Code for clarification. See United Sav. Ass’n v. Timbers of Inwood Forest Assocs., Ltd., 484
U.S. 365, 371 (1988) (“Statutory construction, however, is a holistic endeavor. A provision that may seem
ambiguous in isolation is often clarified by the remainder of the statutory scheme–because the same
terminology is used elsewhere in a context that makes its meaning clear[.]”); Jewel Recovery, L.P. v.
Gordon, 196 B.R. 348, 352 (D.N.D. Tex. 1996); David v. Fechtel, 150 F.3d 486, 488 (5th Cir. 1998)
(“When interpreting a statute, we first look to its plain language. Specific words within a statute, however,
may not be read in isolation of the remainder of that section or the entire statutory scheme.” (internal quotes
and citations omitted)); Finney v. Smith, 141 B.R. 94, 103 (D.E.D. Va. 1992) (“Title 11's various
provisions should not be viewed in isolation. Instead, their interpretation should reflect the interplay
between all of its different parts, so that the Bankruptcy Code can operate as a coherent whole.”); see also
Molitor v. Eidson, 76 F.3d 218, 220 (8th Cir. 1996); In re Hasse, 246 B.R. 247, 253 (Bankr. E.D. Va.
2000) (“Statutes sometimes speak in generalities or contradictions, and when they do, it is unavoidable that
courts will have to fill in gaps in such a way as seems consistent with the overall framework of the statute.”).
22
Moreover, in light of Bildisco's direction, not disturbed by the enactment of § 1113, that CBAs are
executory contracts, the better reading is that § 365 covers assumption and rejection of CBAs, except as
specifically modified with regard to rejection in § 1113. See Massachusetts Air Conditioning, 196 B.R.
at 663 (“Section 1113 is designed to provide additional procedural requirements for rejection or
modification of collective bargaining agreements, and only to that degree supersedes and supplements the
provisions in § 365.” (citing Norfolk & Western Ry. Co. v. American Train Dispatchers Ass’n, 499 U.S.
117, 136 n.2 (Stephens, J., dissenting); Wien Air Alaska, Inc. v. Bachner, 865 F.2d 1106, 1111 n.5, 1112
(9th Cir. 1989)).
We conclude that given the ambiguity in § 1113, § 365(b), coupled with Fed. R. Bankr. P. 600612
which provides that a proceeding to require a debtor to assume an executory contract is governed by Fed.
R. Bankr. P. 9014,13 governs the procedure for assumption of a CBA.14 In comparable settings, the courts
12
Federal Rule of Bankruptcy Procedure 6006 provides in relevant part that a “proceeding to
assume, reject, or assign an executory contract or unexpired lease, other than as part of a plan, is
governed by Rule 9014.” Fed. R. Bankr. P. 6006(a).
13
Federal Rule of Bankruptcy Procedure 9014 provides in relevant part that “[i]n a contested
matter in a case under the Code not otherwise governed by these rules, relief shall be requested by
motion, and reasonable notice and opportunity for hearing shall be afforded the party against whom
relief is sought.” Fed. R. Bankr. P. 9014.
14
The union argues that § 1113 governs the procedure for assumption of a CBA, while § 365
governs the effect of that assumption, specifically claiming that § 365 requires union employees’ unpaid
medical and dental expenses to be treated as administrative expenses upon the debtor’s assumption of
the CBA. As discussed infra in this opinion, this particular argument finds no support in the wording
of § 1113 or § 365, or in the case law.
In addition, we underscore that the extent of our decision here is only that § 365(b) governs the
debtor’s assumption of the CBA. We do not take up the issue of whether other pieces of § 365 are
imported in to § 1113 as well, though we acknowledge that courts have struggled with such issues. For
example, courts disagree as to whether § 1113 displaces § 365(g), in other words, whether the
debtor’s rejection of the CBA gives the union employees a claim for damages. See Keating, 35 WM.
& MARY L. REV. at 534-35 (“Some courts hold that because section 1113, unlike section 365, does
not specifically provide that rejection gives rise to a claim, then no claim for rejection exists. Further,
these courts contend that allowing union workers a claim based on the rejection of their labor contract
23
have so held.
For example, in American Flint Glass Workers Union v. Anchor Resolution Group, 197 F.3d 76,
82 (3d Cir. 1999), the debtor attempted to assume and assign a CBA. The union urged that § 365(k),
which provides that a debtor may be relieved of its obligations under an executory contract if the contract
has been assumed and assigned to another, did not apply. The Third Circuit disagreed, holding that
§365(k) applied to relieve the debtor of its obligations under the CBA:
there remains the argument that Anchor's non-adherence to the Code § 1113 route as to
the AFU CBAs leaves it liable despite Code § 365(k)'s plain language. Code § 1113(a)
reads:
The debtor in possession . . . may assume or reject a collective bargaining
agreement only in accordance with the provisions of this section.
Accordingly, the argument goes, Code § 1113 and not § 365 is the governing provision
here. That contention rests on an extraordinarily thin reed: that the mere presence of the
word "assume" in Code § 1113(a) requires the application of that provision even where
no modification or rejection of a CBA has occurred. But that argument is at odds with the
plain reading of Code § 1113, which (like the specific prohibition in Code § 1113(f))
speaks only to what must be done by a party in bankruptcy to change–or to free itself
entirely from–the terms of a CBA. ... It is surely no accident that Code § 1113 is entitled
"Rejection of Collective Bargaining Agreements," although we of course recognize that
would defeat the purpose of section 1113. ... Other courts have held that section 1113 was not meant
to displace completely the provisions of section 365 as applied to collective bargaining agreements, but
merely to supplement the Code’s more general rules on the assumption or rejection of executory
contracts. Accordingly, these courts hold that the rules of sections 365(g) and 502(g), which applied
before the enactment of section 1113, should continue to govern these rejection cases, because the
rules of section 365(g) and 502(g) are not inconsistent with the provisions of section 1113.”).
Compare In re Blue Diamond Coal Co., 147 B.R. 720, 729-30 (Bankr. E.D. Tenn. 1992); In re
Armstrong Store Fixtures Corp., 139 B.R. 347, 350 (Bankr. W.D. Pa. 1992), with In re Texas Sheet
Metals, Inc., 90 B.R. 260, 264 (Bankr. S.D. Tex. 1988); In re Garofalo’s Finer Foods, Inc., 117 B.R.
363, 371 (Bankr. N.D. Ill. 1990).
More generally, courts have also found§ 1113's relationship with other Bankruptcy Code
provisions unclear. See, e.g., Jones Truck Lines, Inc. v. Central States, Southeast & Southwest Areas
Pension Fund (In re Jones Truck Lines, Inc.), 130 F.3d 323, 330 (8th Cir. 1997) (discussing interplay
between § 1113(f) and the Bankruptcy Code’s preference provisions, specifically § 547).
24
such legislative captions are not part of the statute itself. We are persuaded that Code §
365 and not Code § 1113 is the applicable provision in the circumstances here.
Id. at 82 (internal citations omitted).
Similarly, in Massachusetts Air Conditioning and Heating Corp. v. McCoy, 196 B.R. 659, 663 (D.
Mass. 1996), the debtor moved to assume its CBA under § 365 and Fed. R. Bankr. P. 6006(a). The
bankruptcy court applied § 365, not § 1113, to the assumption of a CBA and the administrative expense
treatment of claims thereunder as required by § 365(a)(1)(A). The district court affirmed:
Thus, given the plain language of § 1113(b)-(f) (directed in operation solely to termination
or alteration of collective bargaining agreements), and the remedial purpose behind its
enactment (directed to securing special procedures before a collective bargaining
agreement may be rejected or modified), I find that the use of the term assumption in §
1113(a) was at most sloppy legislative drafting. The reference to assumption appears
simply to call out the character of rejection by identifying it with its opposite. Otherwise,
assumption plays no part in the purpose or operation of § 1113. Section 1113 is designed
to provide additional procedural requirements for rejection or modification of collective
bargaining agreements, and only to that degree supercedes and supplements the provisions
in § 365.
By contrast, assumption of collective bargaining agreements continues to be
governed by the provisions for executory contracts under § 365. Nothing in § 1113's plain
language or legislative history indicates that Congress intended to alter Bildisco’s holding
that collective bargaining agreements are executory contracts. Because § 1113 speaks
only to rejection, assumption of a collective bargaining agreement–like any other executory
contract–remains within the province of § 365.
Id. at 663 (internal citations omitted). See also Adventure Resources, Inc. v. Holland, 137 F.3d 786, 798
(4th Cir. 1998) (reasoning that § 1113 has no application to assumption of CBAs; rather § 365 applies);
In re Typocraft Co., 229 B.R. 685, 688 (Bankr. E.D. Mich. 1999) (“Given the language of almost all cases
that have dealt with this issue to the effect that § 365 must be held to govern executory contracts including
CBAs, except to the extent modified by § 1113, one must necessarily conclude that the process of
‘assumption’ of CBAs continues to be governed by the general provisions of statute and rule under
§365.”).
25
This line of authority, which looks to § 365 as the provision governing assumption of a CBA, best
makes sense of the ambiguities regarding assumption in § 1113.15 If a debtor seeks to assume a CBA, it
must comply with the dictates of § 365. See In re Gateway Apparel, Inc., 238 B.R. 162, 164 (Bankr. E.D.
Mo. 1999) (finding that under § 365, debtor’s assumption of employee severance agreements requires
affirmative action in the form of expression of clear intent by the debtor-in-possession, notice of the debtor-
in-possession intention’s to interested parties, and court approval of the debtor-in-possession’s actions).
In particular, the debtor must make a motion to do so as required by § 365(a) and Fed. R. Bankr. P.
9006(a) and 9014, effectively providing creditors and other affected parties with notice and an opportunity
to be heard.16 In addition, § 365 clearly requires the debtor to cure any default under the contract and
provide adequate assurance of future performance of the contract. See 11 U.S.C. § 365(b)(1)(A) & (C)
(1994). The other procedural safeguards contained in § 365 also apply, thus ensuring that assumption is
an orderly, predictable court-controlled process.
15
As the Appellees correctly point out, Congress could have expressly indicated, as it has done
in other Code provisions, that § 1113 was not to be read in conjunction with or subject to the
provisions of § 365. See 11 U.S.C. § 1367 (1994) (“Notwithstanding section 365 of this title,
neither the court nor the trustee may change the wages or working conditions of employees of the
debtor established by a collective bargaining agreement that is subject to the Railway Labor Act except
in accordance with section 6 of such Act.”) (emphasis added).
16
The union asserts that since the parties can modify the CBA consensually under the provisions
of the NLRA, they should be able to agree to the debtor’s assumption of the CBA consensually. This
assumes that the assumption of the CBA affects only the debtor and the union employees covered by
the CBA and overlooks the very important fact that assumption of a CBA in the bankruptcy context
dramatically affects other parties as well, namely, creditors and non-union employees. Indeed, the
union acknowledges that the Debtor’s actions with respect to assumption or rejection of the CBA and
the accompanying treatment of the union employees’ unpaid pre-petition medical and dental expenses
bear directly on the final distributions to creditors under the plan.
26
2. Assumption by Inaction or Denial of a Motion to Reject
The union disagrees and suggests that a CBA can be assumed impliedly under both § 1113 and
§ 365 when a debtor fails to act or, alternatively, that a debtor automatically assumes the CBA upon the
court’s denial of its motion to reject. This argument is flawed for two reasons. First, with rare exception,
the case authorities referenced by the union deal with a wholly different legal question, one the union
specifically disclaims relying upon. Second, to suggest that failed rejection ipso facto amounts to
assumption severely misconstrues the nature of rejection of an executory contract.
a. Assumption by Inaction
We first consider the cases cited by the union for the proposition that assumption may be implied
from a debtor's failure to apply for rejection coupled with continuation of the business. Almost all of these
cases discuss the issue of whether § 1113(f), which prohibits a debtor’s unilateral rejection of the CBA,
entitles unpaid union employees’ expenses to superpriority treatment. See 11 U.S.C. § 1113(f) (“No
provision of this title shall be construed to permit a trustee to unilaterally terminate or alter any provisions
of a collective bargaining agreement prior to compliance with the provisions of this section.”). Two lines
of authority have developed on this issue.
The first stems from the Sixth Circuit’s decision in In re Unimet Corp., 842 F.2d 879, 882-83 (6th
Cir. 1988), cert. denied, 488 U.S. 828 (1988). There, the court held that a debtor-in-possession which
has not rejected a CBA is obligated to pay retiree benefits that have accrued post-petition. See id. at 882.
Unimet was followed by a long line of cases essentially holding that § 1113 was enacted to protect against
a debtor’s unilateral rejection of a CBA, including a debtor’s failure to fulfill its obligations to pay union
employees’ benefits under the CBA. See, e.g., Acorn Bldg. Components, Inc., 170 B.R. 317, 320-21
(E.D. Mich. 1994); United Steelworkers of America v. The Ohio Corrugating Co., No. 4:90 CV 0810,
1991 WL 213850, at **3-4 (N.D. Ohio Jan. 3, 1991); In re Arlene’s Sportswear, 140 B.R. 25, 27-28
27
(Bankr. D. Mass. 1992). More specifically, these cases stand for the proposition that a debtor’s failure
to pay employee benefits without first complying with the rejection procedures set forth in § 1113
represents a constructive assumption of the CBA. See Massachusetts Air Conditioning, 196 B.R. at 664
n.13. Section 1113(f) thus ensures that Ҥ 1113 shall trump all other sections of the Bankruptcy Code,
including the priority provisions in § 507.” Id.
In what has become the majority position, the second line, by contrast, reasons that § 1113 meshes
with the priority scheme in § 507. In re Ionosphere Clubs, Inc., 22 F.3d 403, 407-408 (2d Cir. 1994)
(Ionosphere II); In re Roth American, 975 F.2d 949, 956 (3d Cir. 1992); In re Moline, 144 B.R. 75, 78-
79 (Bankr. N.D. Ill. 1992);In re Typocraft Co., 229 B.R. 685, 689 (Bankr. E.D. Mich. 1999); In re Spirit
Holding Co., Inc., 157 B.R. 879, 882 (Bankr. E.D. Mo. 1993). The rationale under these cases is that
the silence in § 1113 regarding how claims for unilateral rejection are to be treated requires use of other
Bankruptcy Code sections, namely § 507. See Massachusetts Air Conditioning, 196 B.R. at 664 n.13.
Neither line of cases is relevant to our decision here. We do not even need to reach this issue of
priority treatment of the union employees’ unpaid medical and dental expenses because the union has
specifically disclaimed resting its argument on § 1113(f). It has not suggested Debtor unilaterally modified
the CBA, nor has it asserted any claim to superpriority treatment of its claims under § 1113(f). Presumably
it has not done so because it likely could not establish the elements for unilateral rejection17 or because it
believed that we were unlikely to follow the older, now minority, Unimet view. In short, its citation to this
line of authorities is not helpful.
17
The union surely recognizes that Debtor acted promptly to reject the CBA and either paid its
post-petition obligations under the CBA or ensured that such payments would be made by the asset
purchaser.
28
Rather, the union maintains that we should follow the Fourth Circuit's decision in Adventure
Resources, Inc. v. Holland, 137 F.3d 786 (4th Cir. 1998).18 In Adventure Resources, a group of coal
mining companies systematically, both before and after filing bankruptcy petitions, defaulted on obligations
to provide certain pension benefits as required by a CBA. See id. at 791. The issue as framed by the
court was whether "a debtor in bankruptcy operating under the aegis of Chapter 11 may, with regard to
an executory contract in effect at the time of the filing of the petition for reorganization, continue to reap the
benefits of its bargain without concern that the nondebtor party will be made whole for the debtor's
unfulfilled prepetition obligations." Id. at 790. During the forty-three month duration of the Chapter 11
case, the debtors continued to operate using union employees, but failed to pay pension benefits as required
under the terms of the CBA. See id. at 791. Expressly invoking § 365, not § 1113, the court held the
debtors had assumed the CBA as a result of their “failure to reject it in accordance with §1113.” Id. at
798. Moreover, upon assumption of the CBA, the court reasoned, the prepetition pension claims of the
union employees were entitled to administrative expense priority. See id. at 798-99.
As a threshold matter, we think the concept of implied assumption of an executory contract is fatally
flawed. A debtor may breach a contract by inaction, namely by failing to abide by its terms, or unilaterally
18
As support for its reading of Adventure Resources, the union also refers us to the following
language in In re Moline Corp., 144 B.R. 75, 78 (Bankr. N.D. Ill. 1992): “[B]ecause of the more
rigorous standards [of §1113], most collective bargaining agreements would be assumed either by
inaction or denials of motions to reject.” Like many of the other cases the union cites, In re Moline is a
§ 1113(f) case and, therefore, irrelevant to the resolution of the issues in this case. In addition, a close
reading of the case evidences that the court’s comment about assumption is dicta. The union also cites
In re Roth American, Inc., 975 F.2d 949 (3d Cir. 1992). In Roth, the court did, in passing, state that a
debtor may assume a CBA by failing to act to reject. See id. at 954. The issue in Roth was whether
prepetition vacation and severance benefits owed to union employees would be entitled to
administrative expense treatment. See id. at 953. While the court agreed with the union’s argument
that by failing to reject the debtor could be deemed to have “assumed,” the court denied the union's
request for administrative expense treatment. See id. at 957-58. Thus, the “assumption” of the CBA
the court deemed could take place cannot be an assumption in the normal sense of the word, either
under § 1113 (if that is what the court was referring to) or under § 365, because in order to assume a
contract a debtor must, as a matter of law, cure all prepetition defaults.
29
modify or terminate a CBA under Section 1113, namely by failing to reject while taking advantage of
workers (under one line of authority), but it cannot assume an executory contract by inaction. Implied
assumption has no place in the law of executory contracts. Indeed, Section 365(d) presumes
nonassumption by inaction, except in certain specified cases, such as nonresidential real property leases.
See 11 U.S.C. § 365(d)(4) (1994). We find the Adventure Resources decision inconsistent with the
explicit requirement under § 365 that a debtor may assume an executory contract only upon a motion. See
U.S. Postal Serv. v. Dewey Freight Sys., Inc., 31 F.3d 620, 624 (8th Cir. 1994) (making clear that under
§ 365(a), rejection is "subject to the court's approval," and that a debtor seeking such approval must
proceed by motion upon reasonable notice and opportunity for hearing); In re Gateway Apparel, Inc., 238
B.R. 162, 164 (Bankr. E.D. Mo. 1999) ("To be approved by the Court, the intention to assume must be
clearly declared by the Debtor In Possession or Operating Trustee; and notice of this intention must be
given to the necessary parties."); In re 1 Potato 2, Inc., 182 B.R. 540, 542 (Bankr. D. Minn. 1995)
(“Bankruptcy Rule 6006(a) provides that a proceeding to assume or reject an unexpired lease is governed
by Bankruptcy Rule 9014 which in turn states that such relief shall be requested by motion with reasonable
notice and opportunity for hearing.”); In re National Gypsum Co., 208 F.3d 498, 511 (5th Cir. 2000)
(describing procedure for assumption of executory contract);In re United Nesco Container Corp., 47 B.R.
230, 233 (Bankr. E.D. Pa. 1985) (stating that proceeding to reject unexpired lease, other than as part of
plan, is "contested matter," in which relief is requested by motion); In re GP Express Airlines, Inc., 200
B.R. 222, 230 (Bankr. D. Neb. 1996) (suggesting that only debtor-in-possession may seek assumption
of executory contract).
Moreover, regardless of whether the court in Adventure Resources correctly determined that
assumption may occur without the requisite motion by the debtor, the case is factually distinguishable from
the facts this case. Unlike the debtors in Adventure Resources, the Debtor here did not “continue to reap
the benefits of its bargain without concern that the nondebtor party will be made whole for the debtor’s
unfulfilled prepetition obligations.” Adventure Resources, 137 F.3d at 790. Instead, recognizing its dire
financial situation, Debtor actively sought a purchaser and moved quickly to liquidate its assets. It never
30
indicated that it had any intention of remaining in business at the expense of its employees. It initiated the
rejection process almost immediately after the asset sale took place and arranged for the purchaser to
assume or pay, or itself assumed and paid, the Debtor’s post-petition obligations under the CBA. Almost
all of the Debtor’s employees, both union and non-union, were rehired by the purchaser under terms and
conditions nearly as favorable as those under the CBA. Thus, to the extent Adventure Resources stands
for the proposition that there is a concept of assumption by inaction under § 365, the facts in that case are
so disparate as to make it inapplicable to this case.
b. Assumption as a Result of Denial of a Motion to Reject
Next we address the union’s contention that even if assumption by inaction is not permissible, then
certainly assumption follows ipso facto when a debtor applies to reject the CBA and the bankruptcy court
denies that application. More precisely, the union’s argument here is that because assumption represents
the flip-side of rejection, if a debtor tries to reject and loses, the end result must be assumption. To support
its argument, the union cites the Lady H Coal and In re Moline cases.
In Lady H, the court considered the debtor’s application to reject its CBA in conjunction with a
sale of substantially all of its assets. See Lady H, 193 B.R. at 235. The court denied the debtor’s
application to reject, reasoning that rejection was not in the best interests of all affected parties under one
of the American Provision factors. See id. at 241. But the court did approve the asset sale and permitted
the union employees to amend their proofs of claim to assert administrative expense priority for the debtor’s
breach of the CBA. See id. at 242. The court did not, however, discuss the issue of assumption of the
CBA upon the court’s denial of the debtor’s application to reject, nor did the court find that the debtor
assumed the CBA upon denial of the application to reject. In that regard, the Lady H case is not helpful
and neither explicitly, nor implicitly, seems to support the union’s position. As for In re Moline, the court
admittedly provided language to support the union’s argument: “because of the more rigorous standards
[of § 1113], most collective bargaining agreements would be assumed either by inaction or denials of
31
motions to reject.” 144 B.R. at 78. But we find this rather cursory reference about assumption upon denial
of an application to reject to be mere dicta and, therefore, not controlling or substantive.
Finding no case law directly on point, we treat this second issue as one of first impression. We
begin with the widely-accepted premise that rejection represents “a bankruptcy estate’s decision not to
assume.” Michael T. Andrew, Executory Contracts in Bankruptcy: Understanding “Rejection,”
59 U. COLO. L. REV. 845, 848 (1988) [hereinafter Andrew]. The debtor's decision to reject (or not to
assume) "giv[es] rise to a presumption that the debtor has 'breached'" or "will not perform its obligations."
Andrew, 59 U. COLO. L. REV. at 881, 931 ("'Rejection,' although it requires a formal act and court
approval in a reorganization case, is still the same concept: it is the estate's (formal) determination not to
assume the contract or lease, and its occurrence triggers the ancillary rule that a 'breach' of the debtor's
obligations will be deemed to have occurred as of the commencement of bankruptcy, thus permitting a
claim by the non-debtor."). Accordingly, it logically follows that the debtor’s failure to take affirmative
steps to assume or to reject an executory contract or unexpired lease in a reorganization case results in that
contract or lease "rid[ing] through" the bankruptcy case unaffected. Andrew, 59 U. COLO. L. REV. at
881. See generally In re Texaco, Inc., 254 B.R. 536, 557-58 (Bankr. S.D.N.Y. 2000) (citing, inter alia,
In re Cajun Elec. Power Co-op, Inc., 230 B.R. 715, 734 (Bankr. M.D. La. 1999) (executory contracts
which are neither assumed nor rejected during a Chapter 11 proceeding flow through the proceeding
"without alteration"); In re Nevada Emergency Servs., Inc., 39 B.R. 859, 861 n.1 (Bankr. D. Nev. 1984)
("[C]ase law developed under past and current law supports the conclusion that such contracts pass
through the reorganization proceedings unaffected and become an obligation of the reorganized debtor.")).
Moreover, we again reiterate that “[t]he decision to assume or reject a contract or lease [under section
365] must be approved by the court." Collier on Bankruptcy ¶ 365.03 (Lawrence P. King ed., 15th rev.
ed. 1999) (citing Thinking Machs. Corp. v. Mellon Fin. Servs. Corp. (In re Thinking Machs. Corp.), 67
F.3d 1021, 1025 (1st Cir. 1995) ("court approval is a condition precedent to the effectiveness of a
trustee's rejection of a nonresidential lease"). See also Elliott v. Four Seasons Props. (In re Frontier
Props., Inc.), 979 F.2d 1358 (9th Cir. 1992) (court approval of stipulation providing for the assumption
32
of a lease satisfies the requirement that an assumption or rejection be approved by the court)); In re Price
Chopper Supermarkets, Inc., 19 B.R. 462, 466-67 (Bankr. S.D. Cal. 1982) ("Since there is no automatic
assumption or rejection in a Chapter 11 proceeding, then any action must be presented for court approval."
(citing Collier on Bankruptcy ¶ 365.03 (15th ed. 1982)); Sealy Uptown, L.P. v. Kelly Lyn Franchise Co.,
Inc. (In re Kelly Lyn Franchise Co., Inc.), 26 B.R. 441, 444, 445 (Bankr. M.D. Tenn. 1983) (noting that
§ 365(a) makes clear assumption of an executory contract can only occur upon express order of the court).
Accordingly, accepting Andrew’s definition, a request to reject is the antithesis of a request for
assumption, not merely its flip-side. In seeking to reject, or actually rejecting, the CBA, a debtor makes
clear its intention not to assume. Coupled with well-established case law that a debtor must seek
assumption by court order, this understanding of the meaning of rejection undermines the union’s argument
that denial of a debtor’s motion to reject results in assumption. In short, we reject the union’s argument.
A debtor who seeks one form of relief–rejection of the CBA–should not end up with precisely the
opposite–assumption of the CBA.
The union’s argument also carries with it a litany of practical problems. For example, automatic
assumption would yield unpredictably; creditors and other interested parties would not know whether to
support or oppose the debtor’s motion to reject. Moreover, because none of the procedural rules
governing when a debtor may or must seek assumption or when a creditor may force a debtor’s decision
to assume or reject would apply, a debtor would likely put off dealing with the CBA entirely, leaving union
employees hanging. Further, the parties seem to agree that in this case the Debtor cannot cure prepetition
defaults so as to meet a threshold requirement for assumption.
We agree with the bankruptcy court that when a court denies a motion to reject, the inevitable
result is not assumption. There is a fundamental difference under § 1113 between the CBA remaining in
effect upon denial of a debtor’s motion to reject and the debtor’s actual assumption of the CBA. Section
1113(f), as construed by the cases arising under that provision, clearly provides that the CBA remains in
33
effect until rejected. See, e.g., In re Manor Oak Skilled Nursing Facilities, 201 B.R. 348, 350 (Bankr.
W.D.N.Y. 1996) (stating that “all aspects of a collective bargaining agreement remain in effect and binding
until rejection occurs”).19 But the notion that the CBA remains operative during the course of the
bankruptcy prior to rejection is wholly separate and distinct from the notion that the debtor has affirmatively
assumed the CBA and undertaken all of the obligations that accompany such a decision under § 365. The
debtor alone determines whether and when within the course of the bankruptcy case to seek assumption
of the CBA under § 365 or rejection of that agreement under § 1113. Moreover, it seems that a denial
of a rejection application could no doubt be followed, not by assumption, but by a renewed motion to
reject under changed circumstances. And, finally, as the bankruptcy court correctly pointed out, there may
be good reason for a liquidating debtor to defer making a decision about the CBA until after the asset sale,
because assuming a CBA before conversion to a Chapter 7 may seriously disadvantage other unsecured
creditors. See In re Rufener, 53 F.3d at 1066 (noting that § 1113 does not apply in a Chapter 11 case
which is later converted to a Chapter 7 case).
19
Of course, a debtor does not escape its liabilities and obligations under the CBA simply by
failing to take steps to assume or reject that contract during the course of the bankruptcy case. As
discussed supra, if a debtor fails to assume or reject the CBA or delays in making such a decision and
the CBA effectively "rides through" the bankruptcy process, there are several possible consequences.
For example, the CBA will be treated as an executory contract under § 365, rather than § 1113, in a
Chapter 11 case which is converted to a Chapter 7 case. See, e.g., Carpenters Health & Welfare
Trust Funds for California v. Robertson (In re Rufener Constr., Inc.), 53 F.3d 1064, 1066 (9th Cir.
1995)(noting that § 1113 is inapplicable to case converted from Chapter 11 to Chapter 7). In addition,
the debtor may be found to have unilaterally modified or altered the CBA in violation of § 1113(f). See
Massachusetts Air Conditioning, 196 B.R. at 664 n.13; In re Ionosphere Clubs, Inc., 22 F.3d 403,
407-408 (2d Cir. 1994); In re Arlene's Sportswear, 140 B.R. 25, 27-28 (Bankr. D. Mass. 1992).
This last scenario, in turn, raises all kinds of issues about how the union's claims for unpaid pre-
petition claims should be treated, specifically whether such claims are entitled to priority treatment as
administrative expenses or whether they are treated like other claims under the priority scheme of §
507. See Massachusetts Air Conditioning, 196 B.R. at 664 n. 13 (discussing the split of authority on
this issue); see also Keating, 35 WM. & MARY L. REV. at 539-548 (discussing courts' differing views
on the priority treatment of pre-petition claims). We decline to address such issues because they are
not before us in this case.
34
ACCORDINGLY, we reverse the decision of the bankruptcy court on the issue of whether the
debtor can reject the CBA after the § 363 asset sale and remand for further action consistent with this
opinion. We affirm on the issue of whether assumption occurred as a result of the bankruptcy court's denial
of the application to reject.
A true copy.
Attest:
CLERK, U.S. BANKRUPTCY APPELLATE PANEL
FOR THE EIGHTH CIRCUIT
35