ASSESSING EMPLOYEE RIGHTS AND EMPLOYER WRONGS IN BANKRUPTCY - A UNION PERSPECTIVE

Transcription

1 The American Bar Association Section on Labor and Employment Law San Francisco - August 12, 2003 ASSESSING EMPLOYEE RIGHTS AND EMPLOYER WRONGS IN BANKRUPTCY - A UNION PERSPECTIVE Under one [bankruptcy] statutory scheme the federal courts are directed to protect employers and in the other [labor law statutory scheme] they are required to be neutral. Int l Ass n of Machinists. v. Eastern Air Lines, Inc., 121 B.R. 428, 433 (S.D.N.Y. 1990), aff d, 923 F. 2d 26 (2d Cir. 1991)(per curiam) Richard M. Seltzer Cohen, Weiss and Simon LLP 330 West 42nd Street New York, New York (212) rseltzer@cwsny.com

2 ASSESSING EMPLOYEE RIGHTS AND EMPLOYER WRONGS IN BANKRUPTCY - A UNION PERSPECTIVE I. THE UNION ROLE IN BANKRUPTCY A. The Union as a Member of a Creditors' Committee. 1. In major chapter 11 reorganization cases the United States Trustee, an official of the United States Department of Justice, appoints a creditors committee of creditors holding unsecured claims, usually about seven of the creditors holding the largest claims. 11 U.S.C. 1102(a)(1). The creditors committee plays a key role in the case, meeting with, monitoring, investigating, and negotiating the plan of reorganization with the company, known as the debtor or debtor-in-possession. 11 U.S.C The committee may hire attorneys and other professionals who are paid for by the company. 11 U.S.C Labor unions hold claims arising from debts owed under collective bargaining agreements ( CBAs ), including grievances, or have contingent claims, and thus are "creditors" eligible to sit on creditors' committees. In re Altair Airlines, 727 F.2d 88, 91 (3d Cir. 1984); In re Barney's Inc., 197 B.R. 431, (Bankr. S.D.N.Y. 1996); In re Enduro Stainless, Inc., 59 B.R. 603, 605 (Bankr. N.D. Ohio 1986); In re Northeast Dairy Coop. Fed n., Inc., 59 B.R. 531 (Bankr. N.D.N.Y. 1986). Nonetheless, debtors consistently neglect to include unions on the list of the twenty largest creditors filed with the court, the list which serves as the basis for invitations to apply for membership on a committee. 3. Unions holding major claims are now commonly appointed to creditors committees. While some debtors and commercial creditors initially viewed the participation of unions on committees with suspicion, unions and their professionals are generally viewed as knowledgeable experts concerning the debtor's management, potential alternative business strategies, industry trends, and the bankruptcy process itself. However, some smaller employers/debtors, often locked into a more traditional view of the employer/union relationship, remain wary of the union s role on creditors committees. 1

3 4. Unions, like most trade creditors, tend to be strong supporters of strategies to preserve the debtor as a viable, long term going concern. There is a major advantage for the reorganization process in having all parties within the big tent of the creditors committee. 5. Unions have been appointed to chair creditors committees in the Hawaiian Airlines and Midway II Airlines bankruptcies, and appointed as members of the executive committees of the creditors committees in the US Airways and United Airlines Chapter 11 cases. B. The Union as a Party-in-Interest and Creditor. 1. The Union's Right to be Heard. As a creditor as well as a partyin-interest, a union can by heard on all motions that come before the bankruptcy court. 11 U.S.C. 1109(b). a. Bringing Actions. Unions, like other creditors, can file a lawsuit, known as an adversary proceeding, Fed. R. Bankr. P. 7001(1), or a motion, also known as a contested matter. Fed. R. Bankr. P Adversary proceedings include proceedings to recover money or property, Fed. R. Bankr. P. 7001(1), and to obtain an injunction, Fed. R. Bankr. P. 7001(7), while motions cover matters not otherwise considered adversary proceedings. Fed. R. Bankr. P The Federal Rules of Bankruptcy Procedure review the procedures applicable to each type of action. Fed. R. Bankr. P , 9014(b), (c), (d) (e). b. Receipt of Notice. Creditors and parties-in-interest may file a formal notice with the bankruptcy court requesting service, usually on counsel, of all major filings. See 11 U.S.C. 107(a), 1109(b); Fed. R. Bankr. P. 2002, 9007, 9010(b). It is important to review the local bankruptcy court s rules, as many bankruptcy courts have instituted electronic filing and service. Parties with only a minimal or specialized interest in the case should be careful what they ask for; filings in major bankruptcy cases are voluminous.

4 2. Union/Employee Claims a. First Day Wage and Benefit Orders. In larger cases debtors file motions early in the proceeding seeking authority to pay most wages and benefits, at least as long as the company continues operations. b. Bar Date/Proofs of Claim. Creditors generally must file proofs of claim to obtain a recovery in the bankruptcy proceeding. Fed. R. Bankr. P The bankruptcy court or bankruptcy clerk s office sets a bar date by which proofs of claim must be filed, and unions and employees, like other creditors, must strictly comply with these deadlines. Unions are generally considered creditors with a right to file claims arising under collective bargaining agreements. In re Altair Airlines, 727 F.2d 88, 91 (3d Cir. 1984); In re Crouthamel Potato Chip Co., 43 B.R. 934, (Bankr. E.D. Pa. 1984), aff d in part on other grounds, remanded in part on other grounds, 52 B.R. 960 (E.D. Pa. 1985), rev d on other grounds, 786 F.2d 141 (3d Cir.1986). Occasionally bar dates are set for administrative expenses, sometimes in conjunction with a plan of reorganization. c. Section 1113(f) Claims. Section 1113(f) clearly provides that 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. Despite this language, most courts have refused to hold that Section 1113(f) requires the payment of all claims under a CBA as administrative or super priority expenses. Compare In re Ionosphere Clubs, Inc., 22 F.3d 403 (2d Cir. 1994), In re Roth Am., Inc., 975 F.2d 949 (3d Cir. 1992) with In re Unimet Corp., 842 F. 2d 879 (6th Cir. 1988). d. Wage, Vacation, Severance Pay Priority Claims. Employees are entitled, under the bankruptcy priority structure, to a $4650 employee wage priority for wages (including vacation, severance, and sick leave pay) earned 3

5 in the 90 days prior to the bankruptcy. 11 U.S.C. 507 (a)(3). While almost all courts provide administrative priority, pursuant to 11 U.S.C. 507(a)(1) and 503(b), to vacation pay or furlough notice pay accrued during the post-petition bankruptcy period, the Second Circuit is one of the few courts to accord administrative priority to severance pay, based on years of service, for employee separations that occur during the administrative period. Compare Straus-Duparquet, Inc. v. Local Union No. 3, IBEW, 386 F.2d 649 (2d Cir. 1967), with In re Roth Am., Inc. 975 F.2d 949 (3d Cir. 1992). Vacation pay is generally regarded as accruing from day to day. In re Northwest Eng g, Co., 863 F.2d 1313 (7th Cir. 1988). e. WARN Act Claims. Aside from enforcing claims arising under collective bargaining agreements, unions can pursue claims under the WARN Act, 29 U.S.C et seq. United Food & Commercial Workers Union Local 751 v. Brown Group, Inc., 517 U.S. 544 (1996). WARN Act claims are entitled to priority treatment based on the time period of the relevant events. In re Beverage Enterprises, Inc., 225 B.R. 111, (Bankr. E.D. Pa. 1998); In re Hanlin Group, Inc., 176 B.R. 329, (Bankr. D. N.J. 1995); In re Riker Indus., 151 B.R. 823, 825 (Bankr. N.D. Ohio 1993); In re Cargo, Inc.,138 B.R. 923, 925 (Bankr. N.D. Iowa 1992). f. Back Pay Claims. Many courts have, in effect, rewarded companies for terminating employees in violation of a CBA or labor law. These courts have held that all back pay awarded by an arbitrator or the NLRB is an unsecured claim, including back pay for any post-petition period during which the employee should have been reinstated. In re Palau Corp., 18 F.3d 746, (9th Cir. 1994); In re Cont l Airlines, Inc., 148 B.R. 207 (D. Del. 1992); In re Spirit Holding, Inc., 157 B.R. 879, 882 (Bankr. E.D.Mo. 1993). Unsecured claims are often paid, if at all, as a pennies on the dollar distribution in stock or debt. g. Class Claims. Most appellate courts have approved the filing of class claims. In re Birting Fisheries, Inc., 92 F. 3d 939, 940 (9th Cir. 1996); Reid v. White Motor Corp., 4

6 886 F.2d 1462, (6th Cir. 1989); In re Charter Co., 876 F. 2d 866, (11th Cir. 1989); In re Am. Reserve Corp., 840 F. 2d 487, (7th Cir. 1988); In re Trebol Motors Dist. Corp., 220 B.R. 500, 502 (B.A.P. 1st Cir. 1998). The Tenth Circuit s view is somewhat murky. In re Standard Metals Corp., 817 F.2d 625, (10th Cir. 1987), vacated and rev d on other grounds sub nom. Sheftelman v. Standard Metals Corp., 839 F.2d 1383 (10th Cir. 1987) (original decision denying right to file class proof of claim reversed on other grounds); In re Unioil, Inc., 962 F.2d 988, (10th Cir. 1992) (citing original Standard Metals holding). The important bankruptcy court in Delaware agrees the class claims can be filed. See, e.g. In re Kaiser Group Int l, Inc., 278 B.R. 58 (Bankr. D. Del. 2002); In re United Cos. Fin. Corp., 277 B.R. 596, (Bankr. D. Del. 2002). Other lower courts, however, have denied the right to file such claims. See, e.g., In re Firstplus Financial, Inc., 248 B.R. 60, (Bankr. N.D. Tex. 2000). 3. Motion For a Trustee. ALPA immediately saw the need for a trustee in the Eastern Airlines case. 11 U.S.C This position was ultimately vindicated in the appointment of a trustee a year later when the creditors committee finally lost faith in management and separately moved for a trustee. A Boeing affiliate recently successfully moved for the appointment of a trustee in the Hawaiian Airlines case, based on allegations of self-dealing by management. 4. Section 363 Sales. a. Courts take differing views as to whether a buyer's retention of employees and/or assumption of a collective bargaining agreement, per se, should be considered in evaluating alternative offers. See In re After Six, Inc., 154 B.R. 876 (Bankr. E.D. Pa. 1993). However, where one potential purchaser's hiring of employees and/or assumption of some or all employee and retiree obligations will reduce or eliminate major claims against the debtor/seller, e.g., severance, vacation, insurance, there is no dispute that those savings should be considered in evaluating alternative bids. 5

7 b. There is not a great deal of reported bankruptcy case law on claims that a sale of assets violates a collective bargaining agreement and Section See In re Lady H Coal Co., 199 B.R. 595 (S.D.W.Va.), aff d on other grounds, sub nom. In re Leckie Smokeless Coal Co., 99 F.3d 573 (4th Cir. 1996) (Section 363 sale of assets in violation of collective bargaining agreement may result in administrative claim against estate for damages); In re Stein Henry Co., 1992 WL (Bankr. E.D. Pa. 1992) (pursuant to Section 1113, plan of reorganization must provide for compliance with contractual successorship provision). See also Am. Flint Glass Workers v. Anchor Resolution, 197 F.3d 76, (3d Cir. 1999) (A debtor s negotiation of a provision in an asset purchase agreement that binds itself contractually to obtain a change in the legal relations created by a CBA as a condition precedent to closing a sale of substantially all of the debtor s assets is an attempt to effect an alteration of the CBA and implicates the requirements of Section 1113); In re Family Snacks, Inc., 257 B.R. 884, (B.A.P. 8 th Cir. 2001) (where the purchaser of assets signed a new CBA with the union and assumed post-petition employee claims, and where any relevant contractual successorship language was not cited, court holds that Section 1113 proposal may be made after a sale of assets). In the recent sale of assets in the National Steel case, the CBA between the Company and the Steelworkers included a strong contractual successorship provision. The ability of one potential purchaser to reach a new CBA with the union, and the inability of the other potential purchaser to do so, proved to be a major factor in determining the outcome of the asset sale process. c. Plaintiff Discrimination Claims in a Sale of Assets. The Third Circuit recently held that the bankruptcy court properly approved the sale of TWA s assets to American Airlines free and clear of employment discrimination claims brought by the EEOC, including a travel voucher program awarded to flight attendants in settlement of a sex 6

8 discrimination class action. In re Trans World Airlines, Inc., 322 F.3d 283 (3d Cir. 2003). 5. Retention and Severance Programs. a. Pre-petition executive compensation or employment contracts are generally considered executory contracts subject to assumption or rejection by the debtor. An assumption requires a debtor to cure all defaults, including sums owed prepetition, and provide adequate assurance of future performance. 11 U.S.C. 365(b)(1). In the event of rejection a debtor is freed from future actual performance but is subject to an unsecured claim for damages. 11 U.S.C. 365(g). A damages claim for rejection of an employment contract is limited to: (a) compensation for one year following the earlier of the bankruptcy petition or the termination of the contract, and (b) any unpaid compensation due on the earlier of those dates. 11 U.S.C. 502(b)(7). In addition, the employee has a claim for the reasonable value of the services provided post-petition. NLRB v. Bildisco & Bildisco, 465 U.S. 513, 531 (1984) b. Motions for approval of new, post-petition key employee retention and/or severance programs ( KERPs ) are common in large Chapter 11 cases. Approval of such programs is generally sought as a non-ordinary course transaction pursuant to 11 U.S.C. 363(b)(1). In the absence of approval payments pursuant to such programs may be challenged. In one case a bankruptcy court denied approval of such a program without prejudice, largely because of the debtor's failure to consult with the United Steelworkers of America in formulating the program. In re Geneva Steel Co., 236 B.R. 770, 773 (Bankr. D. Utah 1999). c. The adoption of a KERP program may become relevant in a Section 1113 or Section 1114 process, particularly on questions as to whether the debtor s proposal assures that all parties are treated fairly and equitably. 11 U.S.C. 1113(b)(1)(A). Cf. In re Jefley, Inc., 219 B.R. 88, (Bankr. E.D. Pa. 1998). 7

9 d. Unions have vigorously opposed the adoption of KERP programs in such cases as Kmart and Kaiser Aluminum, pointing out the inequities and lack of evidentiary support for such programs. (1) The determinative issue may be the standard pursuant to which courts review such programs. While courts utilize the narrow business judgment test, relying on the formulation of these programs by consultants and the approval of such programs by boards of directors, unions have urged that such programs be reviewed under an administrative expense and/or strict scrutiny test. (2) The alleged key executives themselves often formulate and/or approve such programs and exercise influence over both the consultants and the boards of directors. There is substantial evidence that approval of such programs by board of directors is rarely arms length. See Lucian Arye Bebchuk et al, MANAGERIAL POWER AND RENT EXTRACTION IN THE DESIGN OF EXECUTIVE COMPENSATION (Nat l Bureau of Econ. Research, Working Paper No. 9068, 2002). (a) (b) (c) The substantial influence of managerial power on executive compensation, we argue, is suggested both by a realistic analysis of the processes that produce executive pay and by an examination of the substantial body of empirical evidence on the subject. (p. 1) Managers use compensation consultants primarily to justify executive pay rather than to optimize it. (p. 39) [c]ompensation arrangements approved by boards often deviate from optimal contracting because 8

10 directors are captured or subject to influence by management, sympathetic to management, or simply ineffectual in overseeing compensation. (p.2). (3) The narrow standard of review utilized by bankruptcy courts in considering these programs ignores the reality of these programs and the national furor over excessive executive benefits. (a) The Business Roundtable emphasized that American corporations must set ethical standards for doing what is right, not just what is legally allowable : Those of us who have the privilege to be leaders of corporate America have a special responsibility to our investors, employees and the public. We are responsible for setting the ethical standards under which our companies operate, and for creating and maintaining a corporate culture driven by always doing what is right, not just what is legally allowable. We also understand that public confidence in America s system of corporate governance and its trust in our financial reporting mechanisms have been shaken to the core. It will take much more than words to restore that confidence and trust. Press release, Business Roundtable, Statement on Restoring Investor Trust (July 8, 2002) available at (last visited June 10, 2003) 9

11 (b) Consultants Watson Wyatt emphasized that the loss of employee trust and confidence threatened corporate competitiveness : Worker trust and confidence in senior management have fallen over the past two years and, unless reversed, present a major threat to future corporate competitiveness... Press Release, Watson Wyatt, Declining Levels of Employee Trust are a Major Threat to Corporate Competitiveness, (July 25, 2002) available at visited June 10, 2003) II. THE STATUS OF THE COLLECTIVE BARGAINING AGREEMENT IN BANKRUPTCY A. Section Congress reacted quickly to reverse the Supreme Court's holding in NLRB v. Bildisco and Bildisco, 465 U.S. 513 (1984), that a prepetition CBA was not enforceable following a Chapter 11 bankruptcy filing. Congress enacted a new Section 1113 of the Bankruptcy Code. 11 U.S.C While Section 1113 permits modifications of a CBA under a process which would not be possible under the National Labor Relations Act or the Railway Labor Act outside of bankruptcy, Section 1113 provides in subsections (a) and (f) that Section 1113, with its detailed procedural and substantive requirements and expedited procedures, is the exclusive remedy in the Code for a debtor to modify "any provisions" of a collective bargaining agreement. See In re Unimet Corp., 842 F.2d 879 (6th Cir. 1988). Section 1113 is not applicable to post-petition collective bargaining agreements. In re The Leslie Fay Cos., 168 B.R. 294, (Bankr. S.D.N.Y. 1994). Attempts at unilateral changes or rejection of a CBA may doom later motions pursuant to Section In re Alabama Symphony Ass'n, 211 B.R. 65 (N.D. Ala. 1996). 10

12 1. The contractual duty to arbitrate survives a bankruptcy filing. In re Cont l Airlines, 125 F.3d 120, (3d Cir. 1997); In re Ionosphere Clubs, Inc., 922 F.2d 984 (2d Cir. 1990). This was reconfirmed in the recent decision by the bankruptcy court in the US Airways case, in the context of a contractual challenge to the Company s attempt to implement a distress termination of the pilots defined benefit plan. In re US Airways Group, Inc., Bankr. E.D. Va., No SSM (3/8/03). 2. Right to Strike upon Rejection. Contract rejection gives the union the legal right to strike. Briggs Transp. Co. v. I.B.T., 739 F.2d 341 (8th Cir. 1984). In recent Section 1113 motions Midway II Airlines, United, and US Airways have challenged this conclusion in the context of the Railway Labor Act, without citing any applicable authority. No court has ruled on these arguments. 3. The Necessity Requirement a. Much of the early litigation over Section involved the necessity standard (Other requirements include the provision of the most complete and reliable information available, 11 U.S.C. 1113(b)(1)(A), meeting at reasonable times to confer in good faith in attempting to reach mutually satisfactory agreements, 11 U.S.C. 1113(b)(2), making a proposal that treats all of the affected parties fairly and equitably, 11 U.S.C. 1113(b)(1)(A), and demonstrating that the union has refused to accept such proposal without good cause and that the balance of equities clearly favors rejection of such agreement. 11 U.S.C (c)(2), (3)). b. Section 1113 (b)(1)(a) requires that the debtor s proposal provide for those necessary modifications in the employees benefits and protections that are necessary to permit the reorganization of the debtor... Despite the repetition of the word necessary for emphasis, most courts have given a lenient interpretation of the necessary standard. The Third Circuit takes a strict narrow view, while the Second and Tenth Circuits have taken a wider view, of the "necessary" requirement 11

13 c. The Third Circuit holds that "necessary" means "essential" to prevent liquidation, and is not related to "general longterm viability." Wheeling-Pittsburgh Steel Corp. v. United Steelworkers, 791 F.2d 1074, (3d Cir. 1986). Accord In re Pierce Terminal Warehouse, Inc., 133 B.R. 639 (Bankr. N.D. Iowa 1991). d. The Second Circuit holds that "necessary" means more than desirable but less than what is needed to avoid collapse; changes need not be absolutely minimal. Truck Drivers Local 807 v. Carey Transp., Inc., 816 F.2d 82, (2d Cir. 1987). Focus is determining whether the debtor will "complete the reorganization process successfully," including the period after emergence from bankruptcy. Id. at 90. A debtor's proposal "need not be limited to the bare bones relief that will keep it going." In re Royal Composing Room, Inc., 848 F.2d 345, 350 (2d Cir. 1988). e. The Tenth Circuit in In re Mile Hi Metal Systems, Inc., 899 F.2d 887 (10th Cir. 1990), agrees with the Second Circuit that "necessary" does not mean "absolutely necessary," but instead requires "good faith," "necessary," but not "absolutely minimal" changes. The Tenth Circuit went further and held that even if a portion of the debtor s proposal is illegal, the Union must negotiate the rest of the proposal and attempt to negotiate changes which would "avoid the illegality." 899 F.2d at Fair and Equitable Standard. This provision was enacted to "spread the burdens of saving the company to every constituency while ensuring that all sacrifice to a similar degree." In re Century Brass Products, Inc., 795 F.2d 265, 273 (2d Cir. 1986). Courts have insisted that all parties make some concessions. In re Ky. Truck Sales, 52 B.R. 797, 802 (Bankr. W.D. Ky. 1985); In re Cook United, Inc., 50 B.R. 561, 564 (Bankr. N.D. Ohio 1985). However, courts have not always required concessions to "the same degree," finding an increase in responsibility by managers, and the relative standing within the industry of unionized employees and managers, as relevant to the analysis. Truck Drivers Local 807 v. Carey Transp., Inc., 816 F.2d 82, (2d Cir. 1987). 12

14 5. Retroactive Rejection Not Authorized. A debtor cannot obtain retroactive rejection of a CBA. In re World Sales, Inc., 183 B.R. 872, 878 (B.A.P. 9th Cir.1995); In re Hoffman Bros. Packing Co., 173 B.R. 177, 186 (B.A.P. 9th Cir. 1994). 6. Rejection in the Context of Third Party Leverage a Can a Potential Purchaser's Request for Change in a CBA Meet the "Necessary" Standard? In a case involving lifetime guarantees of employment under a CBA at the New York Daily News, the Second Circuit held that Section 1113 can be employed where a potential purchaser demands contract modifications before it will go forward with a purchase and continue the operation of the business. In re Maxwell Newspapers, Inc., 981 F.2d 85, 87 (2d Cir. 1992). c. US Airways and United have attempted to meet the necessary requirement by pointing to requirements in Debtor-in-Possession ( DIP ) Financing Agreements and positions taken by the Air Transportation Stabilization Board ( ATSB ). d. The use of third party pressure creates pressure on unions and leads to the possibility of implicit or explicit collaboration between debtors and the third parties. 7. Interim Relief. Pursuant to 11 U.S.C. 1113(e), a debtor may request emergency, short term relief if essential to continuation of the business or to avoid irreparable harm. The hearing may be scheduled on an expedited basis. Courts have strictly interpreted these requirements. See, e.g., In re Ionosphere Clubs, Inc, 139 B.R. 772, 780 (S.D.N.Y. 1992); In re Wright Air Lines, Inc., 44 B.R. 744, (Bankr. N.D. Ohio 1984). 8. Pre-Filing Waivers. In the context of restructuring negotiations that take place prior to a bankruptcy and in an attempt to avoid a bankruptcy, unions have obtained company agreements to Section 1113 waivers and factual statements that the substance of Section 1113's requirements have been met. 9. Consensual Modification of a CBA 13

15 a. Consensual Modification of a CBA, at least modifications that include out-of-the-ordinary-course aspects, may require court approval. In re Roth Am., Inc., 975 F.2d 949, 952 (3d Cir. 1992); In re The Leslie Fay Cos., 168 B.R. 294, (Bankr. S.D.N.Y. 1994). b. In recent years, many unions have been successful in obtaining "corporate protections" in return for modifications in collective bargaining agreements in bankruptcy/restructuring situations, e.g., equity, the right to nominate members of the Board of Directors, super majority voting, limitations on upstreaming, commitments to capital expenditures, neutrality clauses, etc. 10. Assumption of a CBA B. Section 1114 a. A plan of reorganization may provide for assumption or rejection of CBAs. b. The US Airways plan of reorganization provided for the assumption of all CBAs, as modified. c. The Fourth Circuit has held that even in the absence of a commitment to assume a CBA, an unrejected CBA is automatically assumed in the absence of a Section 1113 rejection. Adventure Res. Inc. v. Holland, 137 F.3d 786, 798 (4th Cir. 1998). 1. Background. Bankruptcy Code Section 1114, 11 U.S.C. 1114, and its interim statutory predecessors, were enacted in reaction to LTV's attempt to cut off retiree health and life insurance benefits on the day it filed for bankruptcy. See In re Chateaugay Corp., 64 B.R. 990 (S.D.N.Y. 1986). Section 1114 does not allow a debtor, with or without court permission, to eliminate retiree benefits simply because it wants to, particularly in the absence of information concerning reorganization or the treatment of other creditors. In re SPECO Corp., 195 B.R. 674, 679 (Bankr. S.D. Ohio 1996). 14

16 2. Coverage of Union and Non-Union Retirees. Section 1114 provides that the debtor "shall timely pay and shall not modify any retiree benefits" unless the debtor follows the procedures of Section 1114 and gains Court approval, or obtains the agreement of the authorized representative (11 U.S.C. 1114(e)(1)). Retiree benefits are defined as payments to "any entity or person for the purpose of providing or reimbursing payments for retired employees and their spouses and dependents" for medical benefits, hospital benefits, death benefits, etc. (11 U.S.C. 1114(a)). Both union and non-union retirees are covered. 3. General Provisions. Requirements are similar to Section 1113, including the "necessary" requirement. This "necessary" provision raises the same questions involved in the context of Section During legislative consideration of Section 1114, Senator Metzenbaum stated that Congress intended the Third Circuit definition of "necessary" to apply. 134 Cong. Rec. S6823 at 6825 (statement of Sen. Metzenbaum). Contra In re Sun Glo Coal Co., 144 B.R. 58 (Bankr. E.D. Ky. 1992). 4. Liquidating Chapter 11 cases. In a liquidating Chapter 11 case, the "necessary" standard has been interpreted as requiring a showing that relief is necessary to confirm a Chapter 11 liquidating plan. In re Ionosphere Clubs, Inc., 134 B.R. 515 (Bankr. S.D.N.Y. 1991). 5. There is an obvious, huge human cost to the modification or elimination of retiree insurance. Well-paid corporate executives managing a bankruptcy, who often are beneficiaries of KERP Programs, should be particularly sensitive to this issue, especially in evaluating whether the balance of the equities clearly favors modification. III. THE COLLECTIVE BARGAINING PROCESS, BANKRUPTCY, AND DISTRESS TERMINATION OF DEFINED BENEFIT PLANS A. One of the requirements in ERISA for the PBGC to process a distress termination of a defined benefit plan may be met by a bankruptcy court finding similar to Section 1113 standard. 15

17 1. The Bankruptcy court must determine that unless the DB plan is terminated the company will be unable to pay its debts under a plan of reorganization and will be unable to continue in business outside Chapter U.S.C. 1341(c)(B)(ii)(IV). B. However, the PBGC will not proceed with a company s request for a standard or distress termination of a DB plan if the termination would violate a CBA. 29 U.S. 1341(a)(3). 1. The filing of a formal challenge, including a grievance, results in a stay of processing of the distress termination by the PBGC until there is a consensual resolution or a final order. 29 C.F.R (a)(2002) 2. The US Airways court rejected the carrier s request that the court exercise jurisdiction to resolve a challenge to a distress termination under a collective bargaining agreement. 3. A debtor might seek Section 1113 relief modifying any contractual obligation to maintain a DB plan. C. The US Airways case involved somewhat unique circumstances. D. The PBGC may seek an involuntary termination that would otherwise violate a CBA. 29 U.S.C. 1341(a)(3). IV. EMPLOYMENT-RELATED LITIGATION, THE AUTOMATIC STAY, AND JURISDICTIONAL ISSUES A. The automatic stay. The automatic stay stays all lawsuits and claims against the debtor arising prepetition and any act to collect or recover a claim that arose before the bankruptcy petition. 11 U.S.C. 362(a). This includes a stay against the litigation of private employment-related suits. 4. The police and regulatory exception. There is an exception to the automatic stay for the commencement or continuation of an action or proceeding by a governmental unit to enforce police and regulatory power, including to enforce a judgment other than a money judgment. 11 U.S.C. 362(b)(4). Thus, regulatory proceedings by the EEOC and state employment agencies, up to the point prior to actual enforcement of a judgment, are generally considered exempt from the stay. EEOC v. McLean Trucking Co., 16

18 834 F.2d 398, 402 (4th Cir. 1987); EEOC v. Hall s Motor Transit Co., 789 F.2d 1011,1013 (3d Cir. 1986); EEOC v. Rath Packing Co., 787 F.2d. 318, 325 (8th Cir. 1986); In re Pincombe, 256 B.R. 774, 782 (Bankr. N.D. Ill. 2000); In re Mohawk Greenfield Motel Corp., 239 B.R. 1, 9 (Bankr. Mass. 1999). 5. Lifting the stay. A party may move before the bankruptcy court to lift the stay for cause in order to permit all or portions of a lawsuit to proceed outside the bankruptcy court. 11 U.S.C. 362 (e). This is largely a discretionary decision based on many factors, including the effect on the bankruptcy proceedings, whether the debtor s insurance company will defend the litigation, and the status of the litigation. See, e.g., In re Curtis, 40 B.R. 795, (Bankr. D. Utah 1984). A decision denying a motion to lift the stay is immediately appealable to the district court. Am. Mariner Indus. Inc. v. Am. Mariner Indus., 734 F.2d 426 (9th Cir. 1984). 6. Section 105 injunctions protecting the debtor s executives. While the automatic stay does not bar the prosecution of a lawsuit against a debtor s executives, bankruptcy courts have issued injunctions pursuant to Section 105 of the Bankruptcy Code, 11 U.S.C. 105, staying, at least for certain periods of time, the prosecution of such suits. In re Venzke Steel Corp., 142 B.R. 183 (Bankr. N.D. Ohio 1992); In re Ionosphere Clubs, Inc., 111 B.R. 423, 435 (Bankr. S.D.N.Y. 1990), aff d in relevant part, 124 B.R. 635, (S.D.N.Y. 1991). B. Jury Trials. Filing a proof of claim subjects a party to the equitable power of the bankruptcy court and is considered to waive the right to a jury trial. Langenkamp v. Culp, 498 U.S. 42 (1990); Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989). C. Jurisdictional Issues. Pursuant to the Bankruptcy Amendments and Federal Judgship Act of 1984 (enacted after the old bankruptcy system was found to be unconstitutional in Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982)), plenary bankruptcy jurisdiction was assigned to the district court. 28 U.S.C. 1334(a), subject to the district court referring bankruptcy matters to the bankruptcy courts for initial consideration, a referral that has taken place in all districts. The district courts have original and exclusive jurisdiction over all cases under title 11, and original but not exclusive jurisdiction of all civil proceedings 17

19 arising under Title 11 or arising in or related to a case under Title U.S.C (a), (b). The bankruptcy court may only issue final orders in core proceedings; in non-core proceedings it may only issue proposed findings of fact and conclusions of law subject to de novo review in the district court. 28 U.S.C. 157(b)(1), (c)(1). Core proceedings include matters concerning the administration of the estate, and the allowance and disallowance of claims. 28 U.S.C. 157 (b)(2)(a), (B). 1. Motions to withdraw the reference. A proceeding is subject to mandatory withdrawal to the district court if resolution requires consideration of Chapter 11 and other federal laws. 28 U.S.C. 157(d). However, courts have interpreted this provision very narrowly. See, e.g., Matter of Vicars Ins. Agency, 96 F.3d 949, 952 (7th Cir. 1996); In re Ionosphere Clubs, Inc., 922 F. 2d 984, 955 (2d Cir. 1990); In re Ionosphere Clubs, Inc., 103 B.R. 416, 420 (S.D.N.Y. 1989). 2. Personal injury and wrongful death claims Personal injury and wrongful death claims must be tried in a district court. 28 U.S.C. 157(b)(5). 3. Abstention. A district court, in the interests of justice, or in the interest of comity with state courts or respect for state law, may abstain from hearing a proceeding arising under Title 11 or arising in or related to Title U.S.C. 1334(c)(1). The district court must abstain if a party in a proceeding based on a state law claim or state law cause of action related to a case under Title 11 (as contrasted with a case under Title 11 or arising in a case under title 11) if such action could not have been commenced in a federal court absent bankruptcy jurisdiction and if the action can be commenced and timely adjudicated in a state forum of appropriate jurisdiction. 28 U.S.C. 1334(c)(2). 18