Adventure Resources v. Holland

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
ADVENTURE RESOURCES,
INCORPORATED, a West Virginia
corporation; AMIGO SMOKELESS COAL
COMPANY, a West Virginia
corporation; TOMMY CREEK COAL
COMPANY, a West Virginia
corporation; GREEN MOUNTAIN
ENERGY, INCORPORATED, a West
Virginia corporation; M.A.E.
SERVICES, INCORPORATED, a West
Virginia corporation; MABEN ENERGY
CORPORATION, a West Virginia
corporation; RALEIGH LEASING,
INCORPORATED, a West Virginia
corporation; STONEY COAL COMPANY,
a West Virginia corporation; SPRUCE
LAUREL COAL COMPANY, a West No. 96-1557
Virginia corporation; HAWLEY COAL
MINING CORPORATION, a West
Virginia corporation; BICKFORD
MINING, INCORPORATED, also known
as Allports Coals, Incorporated, a
West Virginia corporation; BARRETT
FUEL CORPORATION, successor by
merger to Beckley Lick Run
Company, a West Virginia
corporation; EAST GULF FUEL
CORPORATION, a West Virginia
corporation; COAL X EQUIPMENT &
SUPPLY COMPANY, INCORPORATED,
formerly known as Lakeside Supply
Company, Incorporated, a West
Virginia corporation; BECKLEY
REPAIR & HYDRAULIC SERVICE,
INCORPORATED, a West Virginia
corporation; HALFWAY,
INCORPORATED, a West Virginia
corporation; CHESAPEAKE LEASING,
INCORPORATED, a West Virginia
corporation; PINEY FUEL
CORPORATION, a West Virginia
corporation; LAKESIDE LEASING,
INCORPORATED, formerly known as
Airplane Leasing, Incorporated, a
West Virginia corporation; RALEIGH
SERVICES, INCORPORATED, a West
Virginia corporation; ATLAS COAL
LEASING, INCORPORATED, a West
Virginia corporation; SUGAR CAMP
MINING, INCORPORATED, a West
Virginia corporation; H. D.
ENTERPRISES, LIMITED, a West
Virginia corporation; JET COAL
SERVICES, INCORPORATED, a West
Virginia corporation; MICROBLACK,
INCORPORATED, a West Virginia
corporation; DOVER COAL SALES,
INCORPORATED, a West Virginia
corporation; NO. 10 MINING,
INCORPORATED, a West Virginia
corporation; PANTHER RED ASH LAND
COMPANY, INCORPORATED, a West
Virginia corporation,
Plaintiffs-Appellees,
v.
MICHAEL H. HOLLAND, MARTY D.
HUDSON, ELLIOT A. SEGAL, PAUL R.
2
DEAN, Trustees of the UMWA 1950
Pension Trusts and UMWA 1974
Pension Trusts; UNITED MINE
WORKERS OF AMERICA 1974 PENSION
TRUST; UNITED MINE WORKERS OF
AMERICA 1950 PENSION TRUST;
MICHAEL H. HOLLAND, MARTY D.
HUDSON, ELLIOT A. SEGAL, THOMAS
O. S. RAND, CARLTON R. SICKLES,
and GAIL R. WILENSKY, WILLIAM P.
HOBGOOD, Trustees of the United
Mine Workers of America
Combined Benefit Fund; UNITED
MINE WORKERS OF AMERICA
COMBINED FUND; MICHAEL H.
HOLLAND, MARTY D. HUDSON,
THOMAS F. CONNORS and ROBERT D.
WALLACE, Trustees of the UMWA
1992 Benefit Plan; UNITED MINE
WORKERS OF AMERICA 1992 BENEFIT
PLAN; MICHAEL H. HOLLAND, MARTY
D. HUDSON, THOMAS F. CONNORS,
ELLIOT A. SEGAL, Trustees of the
UMWA 1993 Benefit Plan; UNITED
MINE WORKERS OF AMERICA 1993
BENEFIT PLAN; and MICHAEL H.
HOLLAND, MARTY D. HUDSON, ELLIOT
A. SEGAL, JOSEPH J. STAHL, II,
Trustees of the UMWA Cash
Deferred Savings Plan of 1988;
UNITED MINE WORKERS OF AMERICA
CASH DEFERRED SAVINGS PLAN OF
1988,
Defendants-Appellants,
and
3
DONNA E. SHALALA, Secretary,
Department of Health & Human
Services, Social Security
Administration of the United States
of America,
Defendant.
ADVENTURE RESOURCES,
INCORPORATED, a West Virginia
corporation,
Plaintiff-Appellant,
and
AMIGO SMOKELESS COAL COMPANY, a
West Virginia corporation; TOMMY
CREEK COAL COMPANY, a West
Virginia corporation; GREEN
MOUNTAIN ENERGY, INCORPORATED, a
West Virginia corporation; M.A.E.
SERVICES, INCORPORATED, a West
No. 96-1938
Virginia corporation; MABEN ENERGY
CORPORATION, a West Virginia
corporation; RALEIGH LEASING,
INCORPORATED, a West Virginia
corporation; STONEY COAL COMPANY,
a West Virginia corporation; SPRUCE
LAUREL COAL COMPANY, a West
Virginia corporation; HAWLEY COAL
MINING CORPORATION, a West
Virginia corporation; BICKFORD
MINING, INCORPORATED, also known
as Allports Coals, Incorporated, a
West Virginia corporation; BARRETT
4
FUEL CORPORATION, successor by
merger to Beckley Lick Run
Company, a West Virginia
corporation; EAST GULF FUEL
CORPORATION, a West Virginia
corporation; COAL X EQUIPMENT &
SUPPLY COMPANY, INCORPORATED,
formerly known as Lakeside Supply
Company, Incorporated, a West
Virginia corporation; BECKLEY
REPAIR & HYDRAULIC SERVICE,
INCORPORATED, a West Virginia
corporation; HALFWAY,
INCORPORATED, a West Virginia
corporation; CHESAPEAKE LEASING,
INCORPORATED, a West Virginia
corporation; PINEY FUEL
CORPORATION, a West Virginia
corporation; LAKESIDE LEASING,
INCORPORATED, formerly known as
Airplane Leasing, Incorporated, a
West Virginia corporation; RALEIGH
SERVICES, INCORPORATED, a West
Virginia corporation; ATLAS COAL
LEASING, INCORPORATED, a West
Virginia corporation; SUGAR CAMP
MINING, INCORPORATED, a West
Virginia corporation; H. D.
ENTERPRISES, LIMITED, a West
Virginia corporation; JET COAL
SERVICES, INCORPORATED, a West
Virginia corporation; MICROBLACK,
5
INCORPORATED, a West Virginia
corporation; DOVER COAL SALES,
INCORPORATED, a West Virginia
corporation; NO. 10 MINING,
INCORPORATED, a West Virginia
corporation; PANTHER RED ASH LAND
COMPANY, INCORPORATED, a West
Virginia corporation,
Plaintiffs,
v.
MICHAEL H. HOLLAND, MARTY D.
HUDSON, ELLIOT A. SEGAL, PAUL R.
DEAN, Trustees of the UMWA 1950
Pension Trusts and UMWA 1974
Pension Trusts; UNITED MINE
WORKERS OF AMERICA 1974 PENSION
TRUST; UNITED MINE WORKERS OF
AMERICA 1950 PENSION TRUST;
MICHAEL H. HOLLAND, MARTY D.
HUDSON, ELLIOT A. SEGAL, THOMAS
O. S. RAND, CARLTON R. SICKLES,
and GAIL R. WILENSKY, WILLIAM P.
HOBGOOD, Trustees of the United
Mine Workers of America
Combined Benefit Fund; UNITED
MINE WORKERS OF AMERICA
COMBINED FUND; MICHAEL H.
HOLLAND, MARTY D. HUDSON,
THOMAS F. CONNORS and ROBERT D.
WALLACE, Trustees of the UMWA
1992 Benefit Plan; UNITED MINE
WORKERS OF AMERICA 1992 BENEFIT
PLAN; MICHAEL H. HOLLAND, MARTY
D. HUDSON, THOMAS F. CONNORS,
6
ELLIOT A. SEGAL, Trustees of the
UMWA 1993 Benefit Plan; UNITED
MINE WORKERS OF AMERICA 1993
BENEFIT PLAN; and MICHAEL H.
HOLLAND, MARTY D. HUDSON, ELLIOT
A. SEGAL, JOSEPH J. STAHL, II,
Trustees of the UMWA Cash
Deferred Savings Plan of 1988;
UNITED MINE WORKERS OF AMERICA
CASH DEFERRED SAVINGS PLAN OF
1988,
Defendants-Appellees,
and
DONNA E. SHALALA, Secretary,
Department of Health & Human
Services, Social Security
Administration of the United States
of America,
Defendant.
Appeals from the United States District Court
for the Southern District of West Virginia, at Charleston.
Charles H. Haden II, Chief District Judge.
(CA-94-858-2, BK-91-50509, AP-93-197)
Argued: August 13, 1997
Decided: February 27, 1998
Before RUSSELL,* Circuit Judge, HALL, Senior Circuit Judge,
and MICHAEL, Senior United States District Judge for the
Western District of Virginia, sitting by designation.
_________________________________________________________________
*Judge Russell participated in the decision of this case, but died prior
to the time the opinion was issued. The opinion is filed by a quorum of
the panel pursuant to 28 U.S.C. § 46(d).
7
Affirmed in part, reversed in part, and remanded with instructions by
published opinion. Senior Judge Hall wrote the opinion, in which
Judge Russell and Senior Judge Michael joined.
_________________________________________________________________
COUNSEL
ARGUED: Jami Wintz McKeon, MORGAN, LEWIS & BOCKIUS,
L.L.P., Philadelphia, Pennsylvania, for Appellants. John Allen Rol-
lins, LEWIS, FRIEDBERG, GLASSER, CASEY & ROLLINS,
Charleston, West Virginia, for Appellees. ON BRIEF: David W.
Allen, Larry D. Newsome, Barbara Locklin-George, Brian H. Benjet,
Office of the General Counsel, UMWA HEALTH & RETIREMENT
FUNDS, Washington, D.C.; Marilyn L. Baker, MOONEY, GREEN,
BAKER, GIBSON & SAINDON, P.C., Washington, D.C., for Appel-
lants.
_________________________________________________________________
OPINION
HALL, Senior Circuit Judge:
The primary question before us in this appeal is 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 bar-
gain without concern that the non-debtor party will be made whole for
the debtor's unfulfilled prepetition obligations. We hold, in accor-
dance with the pronouncement of the Supreme Court in NLRB v.
Bildisco & Bildisco, that it may not.
I.
A.
The Adventure Group comprises forty-six companies, all of which
are affiliates or subsidiaries of Adventure Resources, Inc. The Adven-
ture companies are involved, to varying degrees, in nearly every
aspect of the production of coal. For instance, certain of the compa-
8
nies merely own or lease the mine properties and the coal beneath
them. Other Adventure companies actually mine and prepare the coal,
and still others provide support services such as supplies and equip-
ment.
In December 1992, twenty of the Adventure companies filed peti-
tions for reorganization under Chapter 11 of the Bankruptcy Code.
Among the myriad of Adventure's creditors were six trusts estab-
lished to provide pension, health, disability, and death benefits to
members of the United Mine Workers of America and their depen-
dents. Together, these trusts constitute the UMWA Health and Retire-
ment Funds ("the Funds").
Four of the trusts (the 1950 Pension Trust, the 1974 Pension Trust,
the Cash Deferred Savings Plan of 1988, and the 1993 Benefit Plan)
were created as the result of NBCWAs -- collective bargaining
agreements negotiated by the UMWA with the Bituminous Coal
Operators Association.1 The remaining two trusts (the Combined Ben-
efit Fund and the 1992 Benefit Plan) exist by operation of law; they
were established as a result of the enactment of the Coal Industry
Retiree Health Benefit Act, 26 U.S.C. §§ 9701-9722 (the "Coal Act").
Adventure was among the coal operator signatories to the NBCWA
of 1988, the collective bargaining agreement in effect at the time of
the bankruptcy filing. Pursuant to the 1988 agreement, the employers
undertook to ensure the funding of employee pension and health ben-
efits initially payable during the contract term. In addition, the
employers guaranteed the funding of benefits already being adminis-
tered by the 1950 and 1974 Pension Trusts; those trusts were "incor-
porated by reference and made a part of this Agreement." NATIONAL
BITUMINOUS COAL WAGE AGREEMENT OF 1988 art. XX,§§ (b), (c)(1).
Adventure did not live up to its part of the bargain. Instead, as evi-
denced by the preliminary report of an independent business analysis
prepared in 1988, Adventure engaged in a deliberate strategy of
expanding its mining operations at the expense of its employees:
_________________________________________________________________
1 NBCWA is an abbreviation for "National Bituminous Coal Wage
Agreement."
9
In 1985 and a portion of 1986, the companies began exten-
sive mine development. . . . [M]ine development and sus-
taining capital costs are not easily financed, and
management was faced with significant cash obligations.
Management felt that expanding vendor credit beyond the
level being used at the time was impossible and sought other
sources of funds. The decision was made to not make pay-
ments, as due, to the mineworkers pension and benefit
funds. . . . This "funding" mechanism was viewed as short-
term but necessary, and the deferral of these payments was
undertaken.
May 5, 1988, Preliminary Report of David A. Harrah, CPA, to John
P. Lamond, Treasurer, Westmoreland Coal Co.
Adventure's "deferral" of its pension and health benefit contribu-
tions was anything but short-term. Once it had initially defaulted on
its payments to the Funds, Adventure continued to remain in arrears.
Even after filing for reorganization, Adventure satisfied neither its
ongoing obligations to the 1950 and 1974 Pension Trusts, nor those
subsequently imposed by the Coal Act and the 1993 NBCWA.2 As a
result of Adventure's business "`funding' mechanism," the Funds'
claims may exceed $25 million, including approximately $4-5 million
assessed during the 43-month duration of the Chapter 11 bankruptcy.3
B.
The twenty Adventure companies in Chapter 11, joined by eight
non-debtor affiliates, filed this adversary proceeding in the bank-
ruptcy court to determine the viability and priority of the claims filed
by three of the trusts. See 28 U.S.C. § 157(b)(1) (conferring jurisdic-
_________________________________________________________________
2 To comply with the Coal Act, Adventure was required to make pay-
ments to the Combined Benefit Fund and to the 1992 Benefit Plan (the
"Coal Act trusts"). Consistent with the terms of the 1993 NBCWA,
Adventure agreed to contribute to the Cash Deferred Savings Plan of
1988 and to the 1993 Benefit Plan.
3 On July 25, 1996, after the notice of appeal was filed in the instant
matter, the bankruptcy court, upon Adventure's motion, converted the
case to a liquidation proceeding under Chapter 7.
10
tion upon the bankruptcy judges over certain "core" bankruptcy pro-
ceedings, as outlined in § 157(b)(2)). By order dated June 23, 1994,
the district court, pursuant to its authority under 28 U.S.C. § 157(d),
withdrew its reference of the proceeding to the bankruptcy court. The
remaining three trusts were subsequently granted leave to intervene
as additional defendants and to file a counter-complaint against
Adventure.
Following a period of discovery, the Funds moved for partial sum-
mary judgment, contending that virtually all of their claims were enti-
tled to be designated administrative expenses of the bankruptcy estate.
See 11 U.S.C. § 507(a)(1) (according first priority to "administrative
expenses allowed under section 503(b) of this title").4 The district
court, by memorandum opinion and order dated March 8, 1996,
granted the motion as to the claims filed by the Coal Act trusts. See
note 2, supra. However, with respect to the vast bulk of the Funds'
claims, i.e., the pre-bankruptcy amounts owed by Adventure to the
1950 and 1974 Pension Trusts, the court below denied the motion.
Adventure Resources, Inc. v. Holland, 193 B.R. 787 (S.D. W. Va. 1996).5
The district court concluded that the Funds' claims pursuant to the
Coal Act did not accrue until after the filing of the Chapter 11 peti-
tions in late 1992. The initial contributions and benefit premiums
exacted by the terms of the Coal Act are, the district court ruled, taxes
on the bankruptcy estates, and are therefore administrative expenses
within the contemplation of 11 U.S.C. § 503(b)(1)(B)(i). 193 B.R. at
793-96.
_________________________________________________________________
4 Adventure's creditors have filed over $160 million in claims relating
to its pre-bankruptcy operations. During the oral argument of this matter,
counsel for the Chapter 7 trustee surmised that the sale of the estate's
assets will generate only enough cash to pay the secured claims, the costs
of the liquidation, and an unspecified portion of the expenses associated
with the administration of the Chapter 11 bankruptcy.
5 The parties do not appear to dispute that the claims filed by the 1993
Benefit Plan and the Cash Deferred Savings Plan of 1988, to the extent
that they are attributable to obligations assumed by Adventure pursuant
to its 1993 wage agreement, see note 2, supra, are entitled to priority as
postpetition administrative expenses of the bankruptcy estates.
11
Regarding Adventure's obligations to the 1950 and 1974 Pension
Trusts, the district court dismissed the Funds' arguments that 11
U.S.C. §§ 1113(f) and 1114(e) (addressing, respectively, the rejection
in bankruptcy of collective bargaining agreements and the payment of
certain health insurance benefits to retired employees of Chapter 11
debtors) conferred first priority status upon the entirety of those
claims, regardless of whether they accrued prior to the filing of the
petitions. The district court determined instead that any claims for
benefit contributions payable pursuant to an NBCWA were entitled
to administrative expense priority only insofar as they had initially
arisen postpetition. 193 B.R. at 796-98.
The Funds appeal that portion of the district court's order denying
them summary judgment as to the claims of the Pension Trusts origi-
nating prior to Adventure's immersion in bankruptcy. The Chapter 7
trustee cross-appeals the remainder of the order granting summary
judgment to the Funds on the Coal Act claims; the notice of cross-
appeal incorporates the district court's order of June 26, 1996, deny-
ing Adventure's post-proceeding motions for relief under Fed. R. Civ.
P. 59(e) and 60(b).
We agree with the district court that the Funds' claims under the
Coal Act did not arise until after Adventure had already filed its peti-
tions for reorganization. Inasmuch as these claims are for unpaid
taxes, they must be accorded administrative expense priority. Conse-
quently, we affirm the district court's grant of summary judgment to
the Funds as to the Coal Act claims.
The district court also correctly determined that the plain language
of 11 U.S.C. §§ 1113(f) and 1114(e) does not accommodate the
notion that Congress specifically intended to address through those
statutes the priority of claims for unpaid pension benefit obligations.
In the absence of specific direction from the legislative branch, we
conclude that, where such claims emanate from the breach of a collec-
tive bargaining agreement, they are to be granted priority in accor-
dance with the law governing the treatment in bankruptcy of
executory contracts in general.
Thus, where the Chapter 11 debtor has assumed the benefits and
obligations of an existing collective bargaining agreement, but does
12
not comply with its statutory duty to cure all defaults then extant, any
claims arising from the debtor's failure to cure are entitled to first pri-
ority as administrative expenses of the bankruptcy estate. Because the
district court held to the contrary, i.e., that the Funds' claims are not
entitled to any priority to the extent that they are attributable to prepe-
tition defaults, we reverse its grant of summary judgment to Adven-
ture as to the applicable Pension Trust claims. We will explain the
reasons for our holdings in more detail below.
II.
The parties agree that no genuine issue of material fact exists at this
stage of the litigation. Our task is simply to determine, on the undis-
puted facts, which party is entitled to judgment as a matter of law
concerning the issues on appeal. FED. R. CIV. P. 56(c). In that respect,
our review of the district court's application of the law is, as always,
de novo. Patten v. United States, 116 F.3d 1029, 1031 (4th Cir. 1997).
III.
A.
Congress passed the Coal Act to redress the "looming insolvency"
of the trusts that had been established by prior NBCWAs to provide
health care benefits to retired coal miners. LTV Steel Co., Inc. v.
Shalala (In re Chateaugay Corp.), 53 F.3d 478, 484-85 (2d Cir.
1995). To that end, the Act created the Combined Benefit Fund to
secure the continuation of health benefits for those retired miners who
had been receiving them under the old system as of July 20, 1992. 26
U.S.C. § 9703(f). The Act also devised the 1992 Benefit Plan, which
covered two other groups of miners: (1) those eligible for benefits as
of February 1, 1993, and who retired by September 30, 1994; and
(2) those "orphaned" upon the insolvency of an individual employer
benefit plan. § 9712(b).
With regard to both new trusts, the Coal Act assessed initial, "pre-
funding" contributions against the coal operators who had signed the
1988 NBCWA. See §§ 9704(i) (Combined Fund), 9712(d)(1)(A)
(1992 Plan). The Act also specified that, beginning on February 1,
13
1993, the affected operators would pay health benefit premiums to the
trusts, based on the number of beneficiaries assigned to them by the
Social Security Administration. See #8E8E # 9704(b) (Combined Fund),
9712(d)(1)(B) (1992 Plan). Lastly, the Act required the operators to
pay additional premiums to the Combined Fund to provide death ben-
efits for their employees and to ensure health coverage for the indus-
try's unassigned beneficiaries. § 9704(c), (d).
B.
Section 503 of the Bankruptcy Code provides for the payment of
expenses incurred in administering the bankruptcy estate. Allowable
administrative expenses commonly include the direct costs of preserv-
ing the estate (for example, postpetition wages earned by the debtor's
employees) and compensation for services rendered to the estate by
professionals, such as attorneys and accountants. See 11 U.S.C.
§ 503(b)(1)(A), (4). We are more concerned at present, however, with
that category of administrative expenses comprising"any tax . . .
incurred by the estate[.]" § 503(b)(1)(B)(i).6 Claims for taxes, like
those for wages, professional fees, and other administrative expenses,
are entitled to priority over all other unsecured claims. § 507(a)(1).
1.
The trustee contends that the assessments mandated by the Coal
Act are not "taxes." The pertinent case authority is to the contrary. See
In re Leckie Smokeless Coal Co., 99 F.3d 573, 583 (4th Cir. 1996)
(Coal Act premiums are taxes whose validity may be determined in
the federal courts notwithstanding the asserted jurisdictional bars of
the Anti-Injunction Act and the Declaratory Judgment Act), cert.
denied, 117 S. Ct. 1251 (1997).
_________________________________________________________________
6 Section 503(b)(1)(B)(i) excepts from its reach "a tax of a kind speci-
fied in section 507(a)(8) of this title." The latter provision, in turn,
addresses the priority accorded claims of "governmental units" for, inter
alia, certain income, property, employment, and excise taxes. Regardless
of how one might characterize the Funds' Coal Act claims within the
broader rubric of "taxes," the Funds themselves are not governmental
units, and, therefore, their claims are not within the ambit of § 507(a)(8).
Adventure Resources, 193 B.R. at 795 n.15. This aspect of the district
court's ruling has not been challenged on appeal.
14
In Leckie, we recognized that Coal Act obligations "are involuntary
pecuniary burdens imposed by Congress for the public purpose of
restoring financial stability to coal miners' benefit plans,[7] and those
burdens have been imposed as an exercise of Congress's taxing
power." Id., citing Chateaugay at498.8 There is no doubt, then, that
the assessments meet this circuit's definition of a"tax."9
2.
Remaining is the question of whether the taxes levied by the Coal
Act were, in the case of the Adventure companies,"incurred by the
estate[s]." The trustee argues in the negative, pointing out that the
Coal Act was signed into law on October 24, 1992, antedating the fil-
ing of the bankruptcy petitions by more than a month. Under the
terms of the statute, however, no claim could accrue to the Combined
Fund and the 1992 Plan until February 1, 1993, well after the bank-
ruptcy estates had been created.10
_________________________________________________________________
7 Cf. New Neighborhoods, Inc. v. W. Va. Workers' Comp. Fund, 886
F.2d 714, 718 (4th Cir. 1989) ("The `public' purpose of systems such as
the [workers' compensation scheme] in force and effect in West Virginia
is to allocate the burden of the costs of injured employees and/or their
dependents among employers rather than among the general public.").
8 The court in Chateaugay was faced with the precise issue before us.
The Second Circuit concluded that Coal Act assessments are taxes within
the meaning of § 503(b)(1)(B)(i), entitled to administrative expense pri-
ority under § 507(a)(1).
9 See United States v. City of Huntington, W. Va., 999 F.2d 71, 73 n.4
(4th Cir. 1993):
For the purpose of determining claim priority in the context of
bankruptcy, the courts have established the following elements
of a tax: "(a) An involuntary pecuniary burden, regardless of
name, laid upon individuals or property; (b) Imposed by, or
under authority of the legislature; (c) for public purposes,
including the purpose of defraying expenses of government of
undertakings authorized by it; and (d) Under the police or taxing
power of the state."
(quoting In re Lorber Industries, 675 F.2d 1062, 1066 (9th Cir. 1982)).
10 See 26 U.S.C.A. § 9702(c) ("The first plan year of the Combined
Fund shall begin February 1, 1993. . . .") and 26 U.S.C.A. § 9712(b)(2)
15
A "claim" is a "right to payment, whether or not such right is
reduced to judgment, liquidated, unliquidated, fixed, contingent,
matured, unmatured, disputed, undisputed, legal, equitable, secured,
or unsecured[.]" 11 U.S.C.A. § 101(5)(A) (West 1993). Claims, how-
ever, do not exist in a vacuum; they must be possessed by creditors.
See § 101(10) ("creditor" defined as, inter alia, an "entity that has a
claim against the debtor that arose at the time of or before the order
for relief concerning the debtor").
Neither the Combined Fund nor the 1992 Plan were capable of
being anyone's creditor until at least February 1, 1993, the earliest
date on which the trusts could have been entitled to collect their first
premiums. See note 10, supra; 26 U.S.C.A. § 9704(a) (West Supp.
1997) ("Each assigned operator shall pay to the Combined Fund for
each plan year beginning on or after February 1, 1993, an annual pre-
mium[.]"). Consequently, the entirety of the Coal Act claims filed
against Adventure by these two trusts must necessarily have arisen
postpetition.11 We therefore affirm the district court's determination
_________________________________________________________________
("[T]he term `eligible beneficiary' means an individual who . . . but for
the enactment of this chapter, would be eligible to receive benefits from
the 1950 UMWA Benefit Plan or the 1974 UMWA Benefit Plan, based
upon age and service earned as of February 1, 1993[.]") (West Supp.
1997); In re CF & I Fabricators of Utah, Inc. , 169 B.R. 984, 987 (D.
Utah 1994) ("[S]ection 9702 of the Coal Act establishes the Combined
Fund and merges the UMWA 1950 and 1974 Benefit Plans into the
Combined Fund effective February 1, 1993. . . .[S]ection 9712 of the
Coal Act establishes the 1992 Benefit Plan, which also became effective
on February 1, 1993.").
11 We speculated in Leckie that a debtor's liability for future Coal Act
premiums may attach prior to the filing of the bankruptcy petition, invit-
ing the conclusion that a trust's entitlement to such premiums constitutes
a prepetition claim. 99 F.3d at 580-81 & n.9; In re Westmoreland Coal
Co., 213 B.R. 1, 12 (Bankr. D. Colo. 1997) ("[T]he Fourth Circuit [in
Leckie] concluded that Coal Act obligations fell within the bankruptcy
definition of a claim and characterized future premium obligations under
§ 9712 as unmatured and contingent rights[.]"). In Leckie, however, none
of the eight debtors filed for bankruptcy prior to February 1, 1993, the
date that the trusts' creditor status was effectively established. See 99
F.3d at 577 n.3, 578 n.6 (first petition filed on April 16, 1993).
16
that those claims be accorded administrative expense priority as taxes
incurred by the estates.12
IV.
The final matter on appeal involves the Pension Trust claims, the
lion's share of which the district court deemed ineligible for priority
status as having initially accrued prior to the filing of the bankruptcy
petitions. The Funds assert that the district court's ruling was in error,
relying primarily on 11 U.S.C. §§ 1113 and 1114, enacted by Con-
gress during the 1980s in response to a perceived threat to labor sta-
bility and to retiree health benefits posed by the bankruptcy
reorganization of numerous large employers.
A.
Section 1114 simply has no application to the claims of the Pension
Trusts. Although it commands that the trustee or debtor-in-possession
pay "any" retiree benefits as an administrative expense of the bank-
ruptcy estate, see § 1114(e) and note 12 supra, the term "retiree bene-
fits" is limited to
_________________________________________________________________
12 The Funds have argued alternatively that the Coal Act claims should
be accorded first priority status by virtue of 11 U.S.C. § 1114(e), which
provides, in pertinent part:
(1) Notwithstanding any other provision of this title, the
debtor in possession, or the trustee . . . shall timely pay and shall
not modify any retiree benefits, except[by court order after
notice and a hearing, or as the parties may agree]. . . .
(2) Any payment for retiree benefits required to be made
before a plan confirmed under section 1129 of this title is effec-
tive has the status of an allowed administrative expense as pro-
vided in section 503 of this title.
(emphases supplied). The trustee contends (and the district court held)
that § 1114(e) applies only to benefit payments due after the filing of the
bankruptcy petition. The Funds respond forcefully that the word "any" in
paragraphs (1) and (2) encompasses both pre- and postpetition pay-
ments. Inasmuch as we have already decided that all of the Coal Act
claims arose postpetition, we leave for another day the task of ascertain-
ing the scope of § 1114(e).
17
payments to any entity or person for the purpose of provid-
ing or reimbursing payments for retired employees and their
spouses and dependents, for medical, surgical, or hospital
care benefits, or benefits in the event of sickness, accident,
disability, or death under any plan, fund, or program . . .
maintained or established in whole or in part by the debtor
prior to filing a petition commencing a case under this title.
11 U.S.C.A. § 1114(a) (West 1993) (emphasis supplied). True to their
designations, the Pension Trusts administer only pension benefits for
retired coal miners. None of their claims are for the types of benefits
enumerated in § 1114(a).
B.
1.
Section 1113, by contrast, affects the treatment of pension benefits
in bankruptcy to the extent that those benefits exist pursuant to a col-
lective bargaining agreement. The statute provides that a Chapter 11
debtor (or trustee) may reject a collective bargaining agreement "only
in accordance with the provisions of this section." 11 U.S.C.A.
§ 1113(a) (West 1993).13 The whole of the agreement is protected, as
are its components: "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 provi-
sions of this section." § 1113(f).
_________________________________________________________________
13 If the debtor believes that its obligations under a collective bargain-
ing agreement would inhibit its effective reorganization, it must first
make a good-faith effort to negotiate a modification of the contract with
its employees' authorized representative. § 1113(b). In the event of an
impasse, the bankruptcy court may, after notice and a hearing, permit the
debtor to reject the collective bargaining agreement only if (1) the debt-
or's proposed modifications 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) the employees'
authorized representative has, without good cause, refused to accept the
debtor's proposal; and (3) the balance of the equities clearly favors
rejection of the collective bargaining agreement.§ 1113(c).
18
The parties acknowledge that, during the course of its attempted
reorganization, Adventure never sought to reject or modify its labor
agreement with the UMWA in accordance with § 1113; it merely con-
tinued to breach its contractual obligation to pay the premiums due
the Pension Trusts. The Funds maintain that Adventure's breach, in
essence, unilaterally altered the pension contribution provision of the
1988 NBCWA, in contravention of § 1113(f). According to the
Funds, the only means of giving full force and effect to the statute is
to compensate the Pension Trusts for the breach by granting all of
their claims for unpaid premiums priority in distribution from the
bankruptcy estates.
The Funds' position finds some support in the holding of In re Uni-
met Corp., 842 F.2d 879, 884 (6th Cir. 1988). In that case, the court
of appeals opined that § 1113(f)'s "unequivocal" prohibition against
the modification of collective bargaining agreements means that a
debtor in Chapter 11 "cannot escape its obligations in [that] regard."
Id. Unimet was therefore ordered to continue paying health and life
insurance premiums on behalf of its retirees, pursuant to its prepeti-
tion agreement with the steelworkers' union.
We agree that the language employed by Congress in§ 1113 is
unequivocal, insofar as it goes. It plainly imposes a legal duty on the
debtor to honor the terms of a collective bargaining agreement, at
least until that agreement is properly rejected. By implication, the
statute creates a claim on behalf of the debtor's employees in the
event that the debtor fails to comply with the law.
Section 1113, however, offers no advice as to how this new cate-
gory of claims should be treated vis a vis other categories competing
for payment. The statute's silence stands in stark contrast to § 1114,
see Section IV-A supra, which clearly states that "[a]ny payment for
retiree benefits required to be made before a plan confirmed under
section 1129 of this title is effective has the status of an allowed
administrative expense[.]" 11 U.S.C.A. § 1114(e)(2) (West 1993).
The Unimet court explicitly declined to decide whether benefit pre-
miums payable under § 1113 are administrative expenses, deeming
resolution of the issue immaterial to its conclusion that the premiums
had to be paid. 842 F.2d at 884. To the extent that the Sixth Circuit's
19
rationale has been followed by the lower courts, a so-called "superpri-
ority" has attached to claims within the purview of § 1113. E.g.,
Eagle, Inc. v. Local No. 537 of United Ass'n of Journeymen and
Apprentices of Plumbing and Pipe Fitting Indus. of United States and
Canada, AFL-CIO, 198 B.R. 637, 638-39 (D. Mass. 1996).
The obvious difficulty with the approach taken in Unimet and its
progeny is that it engenders disharmony between§ 1113 and the care-
fully ordered hierarchy of priorities embodied in§ 507. "Section 507
is intended to be the exclusive list of priorities in bankruptcy. Pri-
orities are to be fixed by Congress. Courts are not free to fashion their
own rules of superpriorities or subpriorities within any given pri-
ority class." 3 LAWRENCE P. KINGET AL., COLLIER ON BANKRUPTCY
¶ 507.02[2] (15th ed. 1996), cited in In re Ionosphere Clubs, Inc., 22
F.3d 403, 408 (2d Cir. 1994) (Ionosphere II).
The Second and Third Circuits have both observed that, on those
infrequent occasions where Congress has intended to supersede the
general priority scheme set forth in § 507, it has done so explicitly.
See Ionosphere II at 408 (citing § 1114(e)(2)'s allowance of claims
for retiree benefits as administrative expenses); In re Roth American,
Inc., 975 F.2d 949, 956 (3d Cir. 1992) (citing§ 364(c)(1)'s authoriza-
tion for the bankruptcy court to accord "priority over any or all
administrative expenses of the kind specified in section 503(b) or
507(b) of this title" to credit obtained or debt incurred for the purpose
of operating the debtor's business). As we have noted, explicit
instruction from Congress concerning the priority of claims under
§ 1113 is conspicuously absent from the statute. "[T]here is no indica-
tion either from the language or the legislative history of section 1113
that Congress intended to address the priority to be given claims
based on a collective bargaining agreement." Roth American at 956.
We believe that, to the extent possible, Sections 507 and 1113 must
be construed harmoniously. It is imperative to the orderly administra-
tion of the bankruptcy process that § 507 remains, unless otherwise
clearly specified by Congress, the final word on the priorities of com-
peting claims. We can faithfully adhere to that principle in this case
without doing violence to the legislative purpose inherent in § 1113:
Section 507 only establishes the priority of [§ 1113]
claims[;] it does not affect the underlying obligation . . . .
20
Judicial ordering of benefit claims pursuant to§ 507 is not
equivalent to employer avoidance of obligations under a col-
lective bargaining agreement. The collective bargaining
agreement is respected, but the financial obligations issuing
from it are accorded priority consistent with the Bankruptcy
Code.
Ionosphere II at 407 (citation and quotation marks omitted); see Roth
American at 957 ("The congressional goal embodied in section 1113
to give special consideration to a collective bargaining agreement and
encourage the debtor and the union to reach a mutually acceptable
agreement . . . can be satisfied without interfering with the previously
established statutory priorities.").
2.
We conclude that a bankruptcy claim arising from the breach of a
collective bargaining agreement may be accorded priority status only
insofar as it fits into one of the categories singled out for preferential
treatment in § 507. Fortunately for the Funds, the claims of the Pen-
sion Trusts are the proverbial round peg.
i.
We begin with the unremarkable premise that unexpired collective
bargaining agreements are executory contracts. NLRB v. Bildisco &
Bildisco, 465 U.S. 513, 521-22 (1984).14 Their treatment in bank-
ruptcy is, therefore, governed generally by 11 U.S.C. § 365, pertain-
ing to executory contracts and unexpired leases entered into by the
debtor prior to the filing of the bankruptcy petition. Id. at 522-23.
_________________________________________________________________
14 Upon examining the legislative history of the relevant portion of the
Bankruptcy Code, the Supreme Court ascertained that Congress intended
the term "executory contract" to describe those contracts "on which per-
formance is due to some extent on both sides." Bildisco at 522 n.6 (quot-
ing H.R.Rep. No. 95-595, at 347 (1977), reprinted in 1978 U.S.C.C.A.N.
5963, 6303). Collective bargaining agreements typically impose recipro-
cal obligations on the employer and the union, on which performance is
due at all times for the duration of the contract.
21
In Bildisco, the Supreme Court held that a debtor attempting a
Chapter 11 reorganization may reject a collective bargaining agree-
ment that "burdens the estate," provided that"after careful scrutiny"
the equities balance in favor of rejection. Id. at 525-26; see 11 U.S.C.
§ 365(a) (stating that the trustee "may assume or reject any executory
contract or unexpired lease of the debtor"). It was precisely this hold-
ing that inspired Congress's almost immediate enactment of § 1113
"to preclude employers from using bankruptcy law as an offensive
weapon in labor relations by going into bankruptcy and unilaterally
rejecting or modifying the extant collective bargaining agreement (or
exerting leverage at the bargaining table by threatening to do so)."
Roth American at 956 (citation omitted).
However, in erecting § 1113's substantive and procedural obstacles
to the unilateral rejection of collective bargaining agreements, Con-
gress did not indicate that it intended to otherwise restrict the general
application of § 365 to those agreements. Section 1113 "governs only
the conditions under which a debtor may modify or reject a collective
bargaining agreement[.]" Id. (quoting In re Ohio Corrugating Co.,
115 B.R. 572, 578 (Bankr. N.D. Ohio 1990), rev'd ,15 United Steel-
workers of America, AFL-CIO v. Ohio Corrugating Co. , No.
4:90CV0810, 1991 WL 213850 (N.D. Ohio Jan. 3, 1991)).
Thus, § 365 continues to apply to collective bargaining agreements,
except where such an application would create an irreconcilable con-
flict with § 1113. Mass. Air Conditioning & Heating Corp. v. McCoy,
196 B.R. 659, 663 (D. Mass. 1996) ("Section 1113 is designed to pro-
vide additional procedural requirements for rejection or modification
of collective bargaining agreements, and only to that degree super-
sedes and supplements the provisions in § 365.") (citing Norfolk and
Western Ry. Co. v. American Train Dispatchers Ass'n , 499 U.S. 117,
136 n.2 (1991) (Stevens, J., dissenting)). The essential character of
collective bargaining agreements as executory contracts, made plain
in Bildisco, was left undisturbed by Congress.
_________________________________________________________________
15 The bankruptcy court's denial of priority status to the union's claims
for wages and benefits in Ohio Corrugating was summarily reversed by
the district court as inconsistent with the Sixth Circuit's interpretation of
§ 1113 in Unimet.
22
ii.
The collective bargaining agreement between the UMWA and
Adventure was assumed in bankruptcy as the result of the latter's fail-
ure to reject it in accordance with § 1113. Roth American at 957.
Where the debtor-in-possession assumes an executory contract, "it
assumes the contract cum onere[.]"Bildisco at 531 (citation omitted).16
That the obligations of an executory contract be accepted along with
its benefits is made plain by the Bankruptcy Code's requirement that,
as conditions of the contract's assumption, the debtor cure any exist-
ing default and compensate all non-debtor parties for actual pecuniary
losses that have resulted therefrom. See§ 365(b)(1).
Upon assumption of the contract, "the expenses and liabilities
incurred may be treated as administrative expenses, which are
afforded the highest priority on the debtor's estate." Bildisco at 532;
In re Stewart Foods, Inc., 64 F.3d 141, 145 (4th Cir. 1995).17 There
can be no doubt, of course, that the statutory duty to cure any existing
default is a "liability" incurred by the debtor by virtue of its assump-
tion in bankruptcy of an executory contract.
Hence, when Adventure assumed the collective bargaining agree-
ment, it undertook a legal obligation to cure its existing defaults under
that agreement, including the arrears to the Pension Trusts. Adven-
ture's failure to comply with its legal obligation gave rise, under
Bildisco and Stewart Foods, to an administrative expense claim on
behalf of the Pension Trusts for the entirety of the arrearage. In effect,
Adventure's postpetition assumption of its executory labor contract
with the UMWA transformed the prepetition claims of the Pension
_________________________________________________________________
16 "What is taken cum onere is taken subject to an existing burden or
charge." BLACK'S LAW DICTIONARY 342 (5th ed. 1979).
17 If the contract is instead rejected, the resulting damages (including
any prepetition breach) constitute general, unsecured claims against the
estate. Bildisco at 531; see Stewart Foods at 144-45 ("[R]egardless of the
nature of the contract, if at the time of the bankruptcy filing the debtor
has an obligation under the contract to pay money to the non-debtor
party, that obligation is handled as a pre-petition claim in the bankruptcy
proceedings.").
23
Trusts, once not cured, into new claims arising postpetition. In re
Mushroom Transp. Co., Inc., 78 B.R. 754, 759 (Bankr. E.D. Pa. 1987).18
We conclude that the district court erred as a matter of law by
declining to accord administrative expense priority to the Pension
Trust claims insofar as the arrearage they represent initially accrued
prior to the filing of the bankruptcy petitions. We therefore reverse its
grant of summary judgment to Adventure as to those claims.
V.
We affirm the district court's orders of March 8, 1996, and June
26, 1996, granting summary judgment to the Funds regarding the pri-
ority classification of the Coal Act claims. We reverse the district
court's order of March 8, 1996, to the extent that it granted summary
judgment to Adventure regarding the priority classification of the
Pension Trust claims. We remand the matter to the district court with
_________________________________________________________________
18 We tread no new ground in holding that prepetition defaults of exec-
utory contracts and leases assumed in bankruptcy, left uncured, consti-
tute postpetition administrative expenses of the estate. A number of
learned colleagues and commentators have blazed that trail before us.
See, e.g., LJC Corp. v. Boyle, 768 F.2d 1489, 1494 n.6 (D.C. Cir. 1985);
Mass. Air Conditioning & Heating 196 B.R. at 663; In re Moline Corp.,
144 B.R. 75, 79 (Bankr. N.D. Ill. 1992); In re French, 131 B.R. 138, 141
(Bankr. E.D. Mo. 1991); In re Leon's Casuals Co., Inc., 122 B.R. 768,
771 (Bankr. S.D. Ala. 1990); In re Monroe Well Serv., Inc., 83 B.R. 317,
321 (Bankr. E.D. Pa. 1988); Mushroom, 78 B.R. at 759; 2 LAWRENCE P.
KING ET AL., COLLIER ON BANKRUPTCY ¶ 365.08[1] (15th ed. 1996) ("[A]
trustee must proceed cautiously in electing whether to assume or reject
[an executory contract] since an assumption will have the effect of mak-
ing the expenses and liabilities incurred expenses of administration.");
Jesse M. Fried, Executory Contracts and Performance Decisions in
Bankruptcy, 46 DUKE L.J. 517, 525 (1996):
If the trustee "assumes" the [executory] contract, Section 365
binds the bankruptcy estate to the contract, permitting the estate
to seek performance from the other party under the contract's
original terms. [O]bligations in connection with assumed con-
tracts . . . are treated as postpetition administration claims. . . .
Thus, the effect of assumption is that the estate acquires all of
the debtor's rights and obligations under the contract.
24
instructions to enter summary judgment for the Funds as to the Pen-
sion Trust claims, according them administrative expense priority.
AFFIRMED IN PART, REVERSED IN PART,
AND REMANDED WITH INSTRUCTIONS
25