In re Family Snacks, Inc., 00-6076
| Decision Date | 31 January 2001 |
| Docket Number | No. 00-6076,00-6078.,00-6077,00-6076 |
| Citation | 257 BR 884 |
| Court | U.S. Bankruptcy Appellate Panel, Eighth Circuit |
| Parties | In re FAMILY SNACKS, INC., Debtor. United Food & Commercial Workers Union, Local 211, Appellant, v. Family Snacks, Inc. and Official Unsecured Creditors' Committee, Appellees and Cross-Appellants. |
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G. Fordon Atcheson, Michael T. Manley, on brief, Kansas City, KS, for appellant/cross-appellee UFCW.
Mark A. Shaiken, Kansas City, MO, Greta A. McMorris, on brief, Kansas City, KS, for appellee/cross-appellant Unsecured Creditors' Committee.
Stephen B. Sutton, David L. Zeiler, on brief, Kansas City, MO, for appellee/cross-appellant Family Snacks.
Before HILL, SCHERMER, and DREHER, Bankruptcy Appellate Panel Judges.
This appeal raises two questions of apparent first impression as to the interpretation of § 1113 of the Bankruptcy Code. The first is whether a debtor in a Chapter 11 case can reject a collective bargaining agreement even after it has sold virtually all of its assets. The bankruptcy court held that § 1113 did not permit rejection following such a sale. The second is whether the court's denial of a debtor's application for leave to reject its collective bargaining agreement results, ipso facto, in an assumption of such agreement. The bankruptcy court held that it does not.
The union appeals from the bankruptcy court's ruling on the second issue. Debtor and the Official Unsecured Creditors' Committee cross-appeal from the bankruptcy court's ruling on the first. We reverse the bankruptcy court decision regarding rejection and remand for further proceedings in accordance with this decision. We affirm the bankruptcy court's decision regarding the effect of a denial of an application for leave to reject.
Family Snacks, Inc. ("Debtor") produces and distributes potato chips and other snack foods. On August 1, 1998, Debtor entered into a collective bargaining agreement ("CBA") with United Food & Commercial Workers Local 211 ("the union"). The CBA was to remain in effect for five years and provided that Debtor would pay certain of its union employees' medical and dental expenses. In late 1999 and early 2000, Debtor was in serious financial difficulty and fell behind in its payments of these expenses. Shortly before filing for bankruptcy, these unpaid employee medical and dental expenses totaled approximately $491,000.1
On February 14, 2000, Debtor filed a Chapter 11 bankruptcy petition. It was clear from the beginning that Debtor could not rehabilitate itself. For over six months, Debtor had been attempting to sell this increasingly financially distressed company, with little success. Matters were so bleak that for a time the company shut down. Nonetheless, one purchaser was willing to sign a letter of intent to purchase, and on February 25, 2000, Debtor moved for expedited hearing and bankruptcy court approval to carry out a sale of virtually all of its assets under § 363 of the Bankruptcy Code. Concurrently therewith, Debtor moved for an order allowing the purchaser to assume or reject executory contracts and leases, including the CBA, as selected by the purchaser. The letter of intent specifically required that the assets would be sold free and clear of certain liabilities, including any arising under union contracts. It was Debtor's position that the value of the assets of the company could be maximized only if its assets were sold on a going concern basis. The bankruptcy court granted expedited hearing and approved a sale pursuant to the letter of intent and set auction procedures, with the auction to occur on March 13.
The union filed an objection to the sale. It also objected to Debtor's motion to assume or reject executory contracts. The union argued that a sale free and clear of Debtor's obligations under the CBA violated § 1113 and that no sale could occur until Debtor had taken steps to bargain with the union. The union sought to delay the sale until such negotiations could take place or to have payment of unpaid prepetition employee medical and dental expenses under the CBA made a condition of the sale. In essence, the union's position was that, no matter how exigent the circumstances, no sale could take place before Debtor dealt with the prepetition claims Debtor had incurred under the CBA. Debtor responded that the court should approve the sale, since failing to do so would dramatically reduce the amount available to pay creditors.
The first purchaser was unable to arrange financing and withdrew its offer. A new purchaser stepped in, however. The new Purchase Agreement continued to specifically provide that the assets would be sold free and clear of Debtor's liabilities under the CBA. On March 22, 2000, over the union's objections, the bankruptcy court issued its order approving the sale to the new purchaser. The court declined to condition the sale on the purchaser's assumption of the CBA. No appeal was taken from that order and the sale closed on March 29, 2000. The next day the purchaser began operations. It did not assume the CBA. Rather, it hired virtually all union members under terms of a new CBA with the new purchaser that were similar (though not identical) to those in the CBA with Debtor. The purchaser also paid all employees' postpetition medical and dental claims. Thus, as a result of the sale and the Debtor's and the purchaser's actions, all postpetition obligations to union members were fully paid. This left the dispute over the unpaid prepetition medical and dental expenses due under the CBA.
The union had made a motion to have the union employees' prepetition medical and dental expenses treated as an administrative expense. On April 5, when that motion came on for hearing, the bankruptcy judge recused himself from deciding it and a second bankruptcy judge stepped in. By way of order dated April 24, that judge held, without ruling on the merits, that Debtor should be allowed time to negotiate with the union. On April 13, in accordance with § 1113(b)(1)(A) of the Bankruptcy Code, the Debtor had already sent a letter to the union in which it purported to modify the CBA by termination. Debtor noted that, having divested itself of substantially all of its assets, it was not possible to assume the CBA and "thus, the only modification of the CBA that is viable is the termination of that agreement...." Debtor further advised that it intended to file a Chapter 11 plan to deal with its remaining assets and liabilities and to make distributions to creditors in accordance with the priorities established in the Bankruptcy Code. Specifically, Debtor committed to treat union members' prepetition medical and dental expenses as fourth priority expenses under § 507(a)(4) in the plan.
The union rejected Debtor's proposal for termination. The parties continued to negotiate, but were unable to reach an agreement. Thus, on May 1, 2000, Debtor filed an application for leave to reject the CBA. The Official Unsecured Creditors' Committee joined in the application. The bankruptcy court heard Debtor's application for leave to reject, along with the union's still pending motion for an order determining that the unpaid prepetition medical and dental expenses be treated as an administrative expense.
In an order dated June 8, 2000, from which this appeal is taken, the bankruptcy court denied Debtor's application to reject the CBA. The court reasoned that Debtor could not comply with § 1113(b)(1)(A) by showing that rejection was "necessary to permit the reorganization of the debtor." The court construed this language as requiring a debtor to show both that it was reorganizing "with a view to the long run success of the debtor's business" and that "it could emerge from its reorganization as an economically viable operation." While the court appeared to accept the proposition that a debtor who is selling its assets as a going concern may take advantage of § 1113, the court confined § 1113 to instances in which the debtor applied for leave to reject under § 1113 before any asset sale:
Since Family Snacks is not reorganizing, and since, in any event, it now has no employees, rejection of the CBA is not necessary for its reorganization. For this reason, Family Snacks\' motion to reject must be denied.
Debtor and the Official Unsecured Creditors' Committee ("Appellees") cross-appeal from this portion of the decision.
The bankruptcy court then dealt with the union's arguments that Debtor had impliedly assumed the contract at the point of sale or, alternatively, that the CBA had been assumed as a matter of law as a result of the court's ruling on Debtor's application to reject. The court ruled that the first argument, that assumption occurred at the time of sale, was foreclosed by the March 22 order allowing the sale, from which no appeal had been taken. The union does not explicitly challenge this portion of the bankruptcy court's order.2 The union does, however, urge that the bankruptcy court erred when it ruled that denial of an application for rejection did not result, ipso facto, in an assumption of the CBA. Here, the court reasoned, in part, that whether covered by § 1113 or § 365, a debtor must take some affirmative action to assume or reject a CBA, and it is only the debtor who can take such action.
In light of its decision that assumption had not yet occurred, the bankruptcy court then determined that the union's motion to treat the unpaid prepetition medical and dental expenses as an administrative expense was still not ripe for decision and denied the union's motion for administrative expense treatment without prejudice.
The parties raise two issues on appeal. First, was the bankruptcy court correct in concluding that rejection was not an option once an asset sale had occurred because there was no longer a "reorganiz...
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