Opinion
Case No. 03-33186
July 2, 2003
LAWRENCE R. AHERN, ESQ., ANDREW STOSBERG, ESQ., Nashville, Tennessee, for the Debtor.
MICHAEL L. BERNSTEIN, ESQ., Washington, D.C., for AMERICAN CAPITAL STRATEGIES, LTD.
GLEN M. CONNOR, ESQ., Birmingham, Alabama, for THE UNITED STEELWORKERS OF AMERICA, AFL-CIO, LOCAL 5431.
F. SCOTT MILLIGAN, ESQ., Knoxville, Tennessee, for THE INTERNATIONAL ASSOCIATION OF MACHINISTS AEROSPACE WORKERS UNION, LODGE 555.
PATRICIA C. FOSTER, ESQ., Knoxville, Tennessee, for RICHARD F. CLIPPARD, ESQ., THE UNITED STATES TRUSTEE.
BEFORE THE HONORABLE RICHARD STAIR, JR.
MEMORANDUM OPINION (Bench Opinion)
THE COURT: This contested matter is before the court upon the Motion and Supporting Memorandum by the Debtor Seeking Limited Interim Relief from Collective Bargaining Agreements Pursuant to 11 U.S.C. § 1113(e) and Request for Expedited Hearing filed by the Debtor on June 16, 2003. By this Motion, the Debtor asks the court to provide interim relief pursuant to 11 U.S.C. § 1113(e) by allowing it to modify two Collective Bargaining Agreements calling for lump sum payments for vacation benefits due on July 3, 2003. Objections to the Debtor's Motion were filed by the International Association of Machinists and Aerospace Workers Union, Lodge 555, on June 27, 2003, and by the United Steelworkers of America, AFL-CIO, Local 5431, on June 30, 2003. A hearing on the Debtor's Motion was held yesterday, July 1, 2003. The record before me consists of seven exhibits introduced into evidence and the testimony of E. Roger Clark, President and Chief Executive Officer of the Debtor, J. Michael Francis, Chief Financial Officer of the Debtor, Jack T. Hower, Representative of the United Steelworkers Union, and George H. Mays, Representative of the Machinists Union.
This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (O).
The Debtor is a corporation with its principal place of business in Knoxville, Tennessee. The Debtor has been in business in Knoxville under various corporate names since 1904, and it is a manufacturer of bellows, which sense changes in temperature in sensitive products. These bellows are highly sophisticated, high-quality devices used in various larger manufactured products, such as jet engines, electrical power grids, medical equipment, and truck refrigeration devices, among others. The Debtor employs 195 employees, 161 of which are union members and 34 of which are salaried, services more than 200 customers, and utilizes the services of more than 300 vendors.
Recently, the Debtor has undergone management changes, including a buy-out in March 2000 and four different chief executive officers in the last three years. The current president and CEO, Mr. Clark, has been with the Debtor for only three months, while the current CFO, Mr. Francis, has been with the Debtor for only four months. Mr. Clark testified that the Debtor has suffered financial losses over the past three years, losing approximately $5,000,000.00 in 2001, $11,000,000.00 in 2002, and more than $2,200,000.00 between January 1, 2003, and May 31, 2003. Substantially all of the Debtor's assets, valued by Mr. Francis at approximately $15,000,000.00, are encumbered with liens securing obligations to American Capital Strategies, Ltd. of approximately $21,500,000.00. Given its financial stresses, the Debtor filed a voluntary petition under Chapter 11 of the Bankruptcy Code on June 10, 2003, and on June 16, 2003, the Debtor filed the Motion for interim relief presently before me.
At issue is the interim modification, under § 1113(e), of a provision contained in each of the two Collective Bargaining Agreements. The first Agreement, dated October 16, 1999, is between the Debtor and the United Steelworkers Union. The second Agreement, dated October 26, 1999, is between the Debtor and the Machinists Union. Article 4.01 of each Agreement addresses vacation pay and provides, in summary, that based upon the length of employment, each employee shall be entitled to a lump sum payment of his vacation pay for the upcoming year, to be paid by the Debtor "the first payday in July[.]" The first payday in July of this year is represented to be tomorrow, July 3.
The aggregate sum of this vacation pay due to all union employees tomorrow approximates $628,000.00. The Debtor maintains that if it is required to make this lump sum payment, its cash will be depleted, it will be unable to make payroll the week of July 11, 2003, and it will be forced to shut its doors. The United Steelworkers Union and the Machinists Union argue that the Debtor would not be irreparably harmed by making this payment, counted on by the union members, and that denial of the vacation payment would give the Debtor an upper-hand in future negotiations regarding the Collective Bargaining Agreements.
The bankruptcy court may approve the interim modification of a collective bargaining agreement under § 1113(e) of the Bankruptcy Code, which provides in material part:
If during a period when the collective bargaining agreement continues in effect, and if essential to the continuation of the debtor's business, or in order to avoid irreparable damage to the estate, the court, after notice and a hearing, may authorize the trustee to implement interim changes in the terms, conditions, wages, benefits, or work rules provided by a collective bargaining agreement. . . . The implementation of such interim changes shall not render the application for rejection moot.
The United Steelworkers Union argues that interim relief may not be granted because the Debtor has not filed a motion to reject the collective bargaining agreement under § 1113(a). The court disagrees. A party may seek interim relief under § 1113(e) at any time as long as the collective bargaining agreement is still in effect. See 7 COLLIER ON BANKRUPTCY ¶ 1113.04[1] (Lawrence P. King ed., 15th ed. rev. 2003) (citing, among others, San Rafael Baking Co. v. No. Cal. Bakery Drivers Sec. Fund (In re San Rafael Baking Co.), 219 B.R. 860 (B.A.P. 9th Cir. 1998)); see also Beckley Coal Mining Co. v. United Mine Workers of Am., 98 B.R. 690, 695-96 (D.Del. 1988) (holding that in light of the plain language of § 1113(e), a debtor could file a motion for interim relief at any time, as long as the collective bargaining agreement is still in effect, regardless of whether a motion to reject has been filed). Because interim relief is a stop-gap measure, the parties to the collective bargaining agreement are still expected to negotiate towards a modification or rejection in good faith. See 7 COLLIER ON BANKRUPTCY ¶ 1113.04[3] (citing, among others, United Food Commercial Workers Union, Local 328, AFL-CIO v. Almac's Inc., 90 F.3d 1 (1st Cir. 1996) (holding that when it enacted § 1113(e), Congress realized that a chapter 11 debtor may occasionally "require emergency relief from the collective bargaining agreement prior to rejection, assumption, or agreed-upon modification of the agreement."). In this case, it appears that the Debtor is not necessarily inclined to seek rejection of the two Collective Bargaining Agreements if it and the Unions can agree to modifications regarding various labor issues, including vacation pay. In the court's opinion, requiring the Debtor to first file a motion to reject the Agreements is contrary to the purpose of § 1113(e)'s emergency nature.
"[T]he standard for interim relief under § 1113(e) requires a showing that the short term survival of the debtor is threatened unless immediate changes to the collective bargaining agreement are authorized." Shugrue v. Air Line Pilots Ass'n, Int'l (In re Ionosphere Clubs, Inc.), 139 B.R. 772, 782 (S.D.N.Y. 1992). As such, § 1113(e) allows the court to grant interim relief only if either: (1) the relief is "essential to the continuation of the Debtor's business" or (2) if relief is not granted, the estate will suffer "irreparable harm." Each of these alternatives requires the Debtor to show "an immediate level of economic emergency, and interim modifications [will therefore] be limited to those bare minimum short-term requirements which will provide the Debtor with what it needs to survive." In re Blue Diamond Coal Co., No. 91-32611, slip op. at 12 (Bankr. E.D. Tenn. May 31, 1991).
The "essential to" standard is generally construed as meaning "but for" allowing the requested interim relief, the debtor would be forced to liquidate. See In re Salt Creek Freightways, 46 B.R. 347 (Bankr. D. Wyo. 1985); 7 COLLIER ON BANKRUPTCY ¶ 1113.04[4][a]. The debtor faces "a heavy burden . . . to show that interim relief is essential, either financially or administratively, to the continuation of the debtor's business, not merely that compliance with the terms of the collective bargaining agreement is uneconomical or burdensome." 7 COLLIER ON BANKRUPTCY ¶ 1113.04[4][b] (citing In re Wright Air Lines, Inc., 44 B.R. 744, 745 (Bankr. N.D. Ohio 1984)). This requires a debtor to "introduce evidence of anticipated cost-savings, projected loss and other financial projections to justify that the modifications are `essential.'" 7 COLLIER ON BANKRUPTCY — 1113.04[4][b] (citing Wright Air Lines, Inc., 44 B.R. at 745-46). Additionally, "[t]he Court must consider the interest of the debtor to continue a reorganization to continue to, hopefully, reorganize its financial affairs, the creditors who seek payment of their claims, and the employees' hopes of maintaining and continuing jobs." In re Blue Diamond Coal Co., No. 91-32611, slip op. at 14 (quoting In re Russell Transfer, Inc., 48 B.R. 241, 244 (Bankr. W.D. Va. 1985)).
In the case before me, the Debtor has offered irrefutable evidence that if it is required to make the $628,000.00 lump sum payment on July 3, 2003, it will be forced to close its doors. Mr. Francis testified that the Debtor has approximately $750,000.00 in cash, and Mr. Clark testified that the Debtor's weekly payroll is approximately $150,000.00. Clearly, if the Debtor pays out $628,000.00 on July 3, 2003, it will have a deficit of approximately $28,000.00 for payroll the following week, insufficient cash to pay its vendors, and, as Mr. Clark testified, it will be required to shut down. The Debtor cannot operate under a cash deficit, unable to make its payroll obligations, much less reorganize under those conditions. Therefore, the court will grant the Debtor's Motion to modify the two Collective Bargaining Agreements with the United Steelworkers Union and the Machinists Union.
However, even though the Debtor is plainly financially distressed, the court does not believe that it is unable to make any payments whatsoever to the union members. Accordingly, the court will require the Debtor to pay 25% of the aggregate sum due under the terms of the two Collective Bargaining Agreements, or roughly $157,000.00, on July 3, 2003, as required by the Agreements. The court does not believe that this amount will cause the Debtor irreparable harm, especially in light of the expedited bidding procedures approved by the court yesterday and the possible sale of the Debtor's business as a going concern that is designed to occur in early September 2003.
The court reiterates that relief under § 1113(e) is only a temporary measure, designed to allow the parties additional time to negotiate and attempt to resolve the issues existing in the current Collective Bargaining Agreements. It does not relieve the Debtor of its obligation for the balance of the vacation pay due the union workers. The court encourages the Debtor, the United Steelworkers Union, and the Machinists Union to make substantial efforts to resolve the vacation pay and other pressing issues concerning their respective Collective Bargaining Agreements. Clearly, it is in the best interest of the Debtor's employees that the Debtor survive as a going concern. If the Debtor is to survive, however, concessions will obviously be necessary on both sides as to the disagreed-upon issues, and the parties must engage in serious negotiations to resolve their differences. It is in nobody's best interest to shut the doors of this Debtor. The court reminds the Debtor that if it is, in fact, unable to negotiate modifications to the existing Collective Bargaining Agreements and must therefore file a motion to reject under § 1113(a), it must evidence to the court that it has (1) made proposals for modifications to the existing Agreements based upon the most complete and reliable information available at the time of the proposals, (2) provided the Unions with adequate information to allow them to fully access the merits of the proposals, and (3) met with Union representatives and negotiated in good faith to reach mutually acceptable modifications to the Agreements. See § 1113(b); Bowen Enters., Inc. v. United Food Commercial Workers Int'l Union, Local 23, AFL-CIO (In re Bowen Enters., Inc.), 196 B.R. 734, 741 (Bankr. W.D. Pa. 1996); In re Blue Diamond Coal Co., 131 B.R. 633 (Bankr. E.D. Tenn. 1991).
The Debtor proposed an August 8, 2003 deadline for either having new collective bargaining agreements with the Unions in place or for filing a motion to reject the Collective Bargaining Agreements under § 1113(a). This interim relief shall be in effect through August 8, 2003, at which time the court will expect either new collective bargaining agreements with the Unions or the filing of a motion to reject the existing agreements under § 1113(a). I will hold a hearing on August 8, 2003, at 9:00 a.m., to see where the parties are in their negotiations and to determine whether the interim relief should be terminated or extended in whole or in part.
An order consistent with this Memorandum will be entered this afternoon.
ORDER
This contested matter came on for hearing on July 1, 2003, on the Motion and Supporting Memorandum by the Debtor Seeking Limited Interim Relief from Collective Bargaining Agreements Pursuant to 11 U.S.C. § 1113(e) and Request for Expedited Hearing filed by the Debtor on June 16, 2003. For the reasons stated in the memorandum opinion dictated from the bench in open court on July 2, 2003, the court directs the following:
1. The Debtor is granted interim relief from the $628,000.00 in vacation pay due July 3, 2003, pursuant to the terms of the Collective Bargaining Agreements with the International Association of Machinists and Aerospace Workers, Lodge 555, and the United Steel Workers of America, AFL-CIO, Local 5431, to the extent that the Debtor will be required to pay 25%, or approximately $157,000.00, of the total amount due.
2. A hearing will be held on August 8, 2003, at 9:00 a.m., in Bankruptcy Courtroom 1-C, First Floor, Howard H. Baker, Jr. United States Courthouse, Knoxville, Tennessee, to determine whether the interim relief granted herein should be terminated or extended in whole or in part.
SO ORDERED.