In re Certified Air Technologies, Inc.

• Decision Date: 30 September 2003
• Docket Number: No. RS 02-28854 PC.,RS 02-28854 PC.
• Citation: In re Certified Air Technologies, Inc., 300 B.R. 355 (Bankr. C.D. Cal. 2003)
• Parties: In re CERTIFIED AIR TECHNOLOGIES, INC., Debtor.
• Court: U.S. Bankruptcy Court — Central District of California

300 B.R. 355

In re CERTIFIED AIR TECHNOLOGIES, INC., Debtor.

No. RS 02-28854 PC.

United States Bankruptcy Court, C.D. California, Riverside Division.

September 30, 2003.

COPYRIGHT MATERIAL OMITTED

Naomi R. Bernstein, Bernstein Law Corporation, Rancho Cucamonga, CA, for Certified Air Technologies, Inc.

Laurie A. Traktman, Gilbert & Sackman, Los Angeles, CA, for Airconditioning and Refrigeration Industry Trust Funds, Sheet Metal Trust Funds, and the Pipe Trades Trust Funds.

MEMORANDUM DECISION

PETER H. CARROLL, Bankruptcy Judge.

On September 2, 2003, the court conducted a hearing on the objections of Certified Air Technologies, Inc. ("CAT") to the following proofs of claim pursuant to Fed.R.Bankr.P. 3007: (a) Proof of Claim of the Airconditioning and Refrigeration Industry Trust Funds¹ dated July 9, 2003, as amended on August 13, 2003; (b) Proof of Claim of the Sheet Metal Trust Funds² dated July 9, 2003, as amended on August 13, 2003, and (c) Proof of Claim of the Pipe Trades Trust Funds³ dated July 9, 2003, as amended on August 13, 2003. Naomi Bernstein appeared for CAT, and Laurie A. Traktman appeared for the Airconditioning and Refrigeration Industry Trust Funds ("ARITF"), Sheet Metal Trust Funds ("SMTF"), and the Pipe Trades Trust Funds ("PTTF"). The court, having considered the proofs of claim and CAT's objections thereto, the evidentiary record, and arguments of counsel, makes the following findings of fact and conclusions of law.⁴

I. STATEMENT OF FACTS

CAT is a California corporation which has done business as a heating and air conditioning contractor in Chino, California, since 1989. On November 20, 2002, CAT filed its voluntary petition for reorganization under chapter 11 in this case. At the time of bankruptcy, CAT was a party to a collective bargaining agreement with each of the following entities with respect to its employees: (a) Sheet Metal Workers' International Association, AFL-CIO, Local No. 108; (b) United Association of Journeymen and Apprentices of the Plumbing and Pipe Fitting Industry, AFL-CIO, Local No. 250, and (c) Southern California Pipe Trades District Council No. 16 of the United Association of Journeymen and Apprentices of the Plumbing and Pipe Fitting Industry, AFL-CIO. CAT has not rejected any of its collective bargaining agreements pursuant to 11 U.S.C. § 1113.

ARITF, SMTF and PTTF are multi-employer "employee benefit plans" created and maintained pursuant to Section 302(c)(5) of the Labor Management Relations Act of 1947, 29 U.S.C. § 186(c)(5), and the Employee Retirement Income Security Act of 1974 ("ERISA"), as amended, 29 U.S.C. § 1001, et seq. Each of the trust funds provides some sort of health, pension, vacation, educational, or similar benefit to CAT's employees. The trust funds are funded by employer contributions and payroll deductions.⁵ CAT is required by the collective bargaining agreements to make timely and adequate contributions on behalf of its employees.⁶ CAT defaulted in the payment of employee benefit fund contributions prior to bankruptcy. ARITF, SMTF and PTTF seek the allowance of claims for unpaid pre-petition employee benefit fund contributions, plus liquidated damages and attorneys fees.

A. SMTF's Claim

SMTF asserts an administrative claim of $2,492.53 in unpaid employee benefit plan contributions accruing prior to bankruptcy, plus liquidated damages of $4,405.62 and $5,000 in attorneys fees. SMTF argues that § 1113(f) entitles its pre-petition claim for delinquent benefit plan contributions to treatment as an administrative expense because the claim resulted from CAT's breach of an unrejected collective bargaining agreement. CAT objects to the claim, arguing that a debt incurred pre-petition cannot be allowed as an administrative expense. CAT asserts that SMTF's claim for unpaid employee benefit contributions of $2,492.53, which accrued within 180 days before the filing of the petition, should be allowed as an unsecured priority claim under § 507(a)(4), and that its claim for liquidated damages and attorneys fees totaling $9,405.62 should be allowed as a general unsecured claim.

B. PTTF's Claim

Pursuant to § 1113(f), PTTF seeks an administrative claim of $17,093.41⁷ for delinquent pre-petition employee benefit plan contributions, plus liquidated damages of $1,856.88 and $5,000 in attorneys fees⁸. CAT objects to the claim, arguing that PTTF's claim for delinquent benefit contributions of $17,093.41, which accrued within 180 days before the filing of the petition, should be allowed as an unsecured priority claim pursuant to § 507(a)(4), and that its claim for liquidated damages and attorneys fees totaling $6,856.88 should be allowed as a general unsecured claim.

C. ARITF's Claim

ARITF seeks allowance of a $156,538.67⁹ administrative claim under § 1113(f), consisting of unpaid pre-petition employee benefit plan contributions of $135,179.50, liquidated damages of $12,359.17, and attorneys fees of $9,000. CAT objects, contending that ARITF's claim is subject to § 507. CAT contends that contributions of $10,589.87¹⁰ for vacation and holiday benefits accruing to the "Vacation Account" within 90 days prior to bankruptcy should be allowed under § 507(a)(3), and the remaining plan contributions of $124,589.63 accruing within 180 days before the filing of CAT's petition are entitled to priority under § 507(a)(4). CAT further contends that ARITF's claim for liquidated damages and attorneys fees totaling $21,359.17 should be classified as a general unsecured claim.

In the alternative, ARITF asserts that $45,574.52 of its claim for unpaid pre-petition benefit payments represents delinquent contributions to a pooled account used to provide medical benefits to CAT's employees, including retirees. ARITF reasons that the $45,574.52 should be allowed as an administrative expense under § 1114(e)(2) because "an unsegregated and undivided portion of CAT's delinquent contributions constitute retiree benefits within the meaning of § 1114(a)." CAT objects to treatment of the ARITF's pre-petition claim for health plan contributions as an administrative expense under § 1114(e)(2), arguing that the statute relates to payments made by the debtor to retirees, not to deposits into a pooled health plan that provides medical benefits to active and retired employees.

CAT concedes that ARITF, SMTF and PTTF (hereinafter, the "Trust Funds") have valid claims for vacation pay and unpaid pre-petition plan contributions. The issue before the court is the priority to be accorded the claims. The Trust Funds argue that § 1113, which controls the assumption or rejection of collective bargaining agreements in chapter 11 cases,¹¹ establishes a "superpriority" status for wage and benefit claims arising out of collective bargaining agreements. According to the Trust Funds, all unpaid employee benefit plan contributions due under CAT's collective bargaining agreements are entitled to treatment as administrative expenses, regardless of whether the benefits were earned pre-petition or post-petition. Trust Funds contend that CAT's pre-petition breach of its collective bargaining agreements unilaterally altered the terms of such agreements in violation of § 1113(f) and that CAT's modification can be remedied only by immediate and full payment of the pre-petition delinquencies as administrative expenses in this case.¹² CAT disagrees, claiming that § 507's priority scheme is not superceded by § 1113(f).

II. ISSUES

1. Whether § 1113(f) trumps the priorities established by Congress in § 507.

2. Whether ARITF's claim of $45,574.52 for delinquent pre-petition contributions to the Airconditioning and Refrigeration Industry Health and Welfare Trust Fund ("Health Fund"), a multi-employer pooled account used to provide medical benefits to employees and retirees, should be allowed as an administrative expense under § 1114(e)(2).

III. DISCUSSION

A. Section 507(a)(1)

Section 507(a) creates nine categories of priority claims. Administrative expenses allowed under § 503(b), including wages, salaries, or commissions for services rendered after the commencement of the case, are entitled to first priority under § 507(a)(1).¹³ Section 507(a)(3) contains a priority for wages, salaries and commissions, including vacation and severance pay, up to $4,650 per individual, provided the amounts are earned within ninety days before the earlier of the filing of the petition or the date of the cessation of the debtor's business.¹⁴ Allowed unsecured claims for contributions to an employee benefit plan are entitled to priority under § 507(a)(4), so long as the contributions are attributable to services rendered within 180 days before the earlier of the date of the filing of the petition or the date of the cessation of the debtor's business.¹⁵ Because the amount payable to employee benefit plans under § 507(a)(4) is reduced dollar-for-dollar by the amounts allowed to employees under § 507(a)(3), the priority established for employment related claims does not exceed $4,650.¹⁶

B. Section 1113.

Section 1113 was enacted by Congress in response to the Supreme Court's decision in NLRB v. Bildisco & Bildisco, 465 U.S. 513, 104 S.Ct. 1188, 79 L.Ed.2d 482 (1984). In Bildisco, the Supreme Court held that a collective bargaining agreement could be rejected in chapter 11 once it was established that the agreement "burdens the estate, and that after careful scrutiny, the equities balance in favor of rejecting the labor contract." Id. at 526, 104 S.Ct. 1188. Congress added section 1113 to prevent "employers from using a threat of bankruptcy, and a subsequent unilateral rejection of the collective bargaining agreement, as leverage in labor contract negotiations." Int'l Bhd. of Teamsters v. Kitty Hawk Int'l, Inc. (In re Kitty Hawk, Inc.), 255 B.R. 428, 432 (Bankr.N.D.Tex.2000). See Century Brass Prods., Inc. v. Int'l Union, United Auto. Aerospace and Agric. Implement Workers (In re Century Brass Prods., Inc.), 795 F.2d 265,...