In re Rath Packing Co.

• Decision Date: 12 January 1984
• Docket Number: Bankruptcy No. 83-02293.
• Citation: 36 BR 979
• Parties: In re The RATH PACKING COMPANY an Iowa Corporation, Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Iowa

36 B.R. 979 (1984)

In re The RATH PACKING COMPANY an Iowa Corporation, Debtor.

Bankruptcy No. 83-02293.

United States Bankruptcy Court, N.D. Iowa.

January 12, 1984.

Jenner & Block, Chicago, Ill., and R. Fred Dumbaugh, Cedar Rapids, Iowa, for debtor.

Robert E. Funk, Jr., Kansas City, Kan., for Intern. Union.

Harry H. Smith, Sioux City, Iowa, for Local No. 46.

Marc E. Richards and Robert F. Wilson, Cedar Rapids, Iowa, for Employees' Creditor and Equity Committee.

Gary D. Iversen and Barbara Rom, Waterloo, Iowa, for unsecured creditors' committee.

Steven J. Pace, Cedar Rapids, Iowa, for Sec. Pacific Business Credit, Inc.

Findings of Fact, Conclusions of Law, and ORDERS re Application to Reject Executory Contracts and Related Matters, with Memorandum

WILLIAM W. THINNES, Bankruptcy Judge.

The matter before the Court is an Application to Reject Executory Contracts, filed by The Rath Packing Company, Debtor-in-Possession (Rath), seeking to reject "certain collective bargaining agreements" between Rath, the United Food & Commercial Workers International Union (the International), and the local unions representing the employees at the various Rath plants.

On November 1, 1983, Rath filed its Petition for Relief under Chapter 11 of Title 11 of the United States Code, and is currently operating as a Debtor-in-Possession. Also on November 1, 1983, Rath filed the Application now before the Court. A hearing on that Application was scheduled for November 29, 1983, but was continued at the request of the International to allow additional time for discovery and preparation for an evidentiary hearing. Also on November 29, 1983, the Court approved the formation of an Employees' Creditor and Equity Committee (hereinafter "Committee"). The hearing on Rath's Application to Reject Executory Contracts was rescheduled for December 19, 1983, and the Court admonished the parties to proceed diligently with discovery and to continue negotiations toward a settlement of this matter.

On December 19, 1983, both the International and the Committee requested a continuance, citing the need for additional discovery and preparation. The Court denied the International's Motion, finding it had not diligently pursued discovery during the time allotted by the Court. The Committee's Motion was granted, however, and hearing was ordered continued until December 27, 1983. Subsequently, the parties informed the Court that they had forged a compromise that would allow the hearing to proceed on December 20, 1983 (the next day); the Committee and the International withdrew their Motions for a continuance, and the Court approved this agreement. Hearing on Rath's Application was held on December 20, 1983, and continued through December 21 and a portion of December 22. All interested parties were afforded an opportunity to call and examine witnesses, and various exhibits were offered and admitted into evidence. The Court reserved ruling on objections to the admission of certain exhibits, admitting those exhibits subject to the objections interposed. Rulings on those objections are set out infra.

Appearing at the hearing beginning on December 20, 1983, were the following attorneys: Michael Rovell, Ronald R. Peterson, and Kenneth Kroot of Jenner & Block and R. Fred Dumbaugh of Dumbaugh, Booth & Chapman, for Rath Packing Company; Robert E. Funk, Jr., for United Food & Commercial Workers International Union; Harry H. Smith of Smith & Smith, for United Food & Commercial Workers Local 46; Marc E. Richards of Booth, Lipton & Lipton and Robert F. Wilson, for Employees' Creditor and Equity Committee; Gary D. Iversen of Mosier, Thomas, Beatty, Dutton, Braun & Staack, and Barbara Rom of Hertzberg, Jacob & Weingarten, P.C., for Unsecured Creditors' Committee; and Thomas Peffer and Steven J. Pace of Shuttleworth & Ingersoll for Security Pacific Business Credit, Inc.

Upon the conclusion of all evidence and after the closing arguments, the Court took this matter under advisement. On December 30, 1983, this Court entered an Order denying in part and granting in part the Application. Now being fully advised, the Court, pursuant to F.R.B.P. 7052, makes the following Findings of Fact, Conclusions of Law, and Orders.

I. FACTS

The Rath Packing Company began operations in 1891. A packer of meat products, Rath's plants were located, inter alia, in Los Angeles, Seattle, San Antonio, Indianapolis, Waterloo (Iowa), and Columbus Junction (Iowa). In the early 1950's Rath had approximately 5400 employees.

In 1976, Rath employees voted to purchase stock in the company with a portion of their weekly earnings. According to a company brochure, this "innovative step was necessary due to the financial losses which threatened the existence of the company." Since that time, the employees have purchased about 49 percent of Rath's common stock through an Employee Stock Option Plan (ESOP). As a result of the ESOP, three employees were elected to Rath's Board of Directors.¹

The "financial losses which threatened the company" continued during the period 1978 to 1983. Lyle Taylor, Rath's President and Chief Executive Officer, testified to the following profit and loss profile:

                1978 lost             $6,276,000
                1979 lost              1,407,000
                1980 earned            2,321,000
                1981 lost              9,602,000
                1982 lost              6,492,000
                

According to Taylor, Rath would lose $10,000,000 in 1983. In sum, during the six-year period from 1978 to 1983, Rath netted a loss of $31,456,000.

Approximately 80 percent of Rath's employees are members of labor unions. According to Taylor, "over the course of . . . the last five years, the employees have given up millions of dollars in concessions to the company." These concessions included, for example, a 1978 cessation of incentive pay. This concession was valued at approximately $2,000,000. In 1979, the employees gave up, by way of deferral, a 15 cent per hour wage increase, one-half pay for holidays, one-half pay for vacation, and the first three days of sick leave. These concessions totaled approximately $17,000,000. In 1981 and 1982, the employees' pension plan was terminated. No dollar value was placed on this termination. Taylor's testimony does indicate, however, that the termination absolved the company of a $9,000,000 obligation. In 1982, the employees eschewed $16 per week for capital investment and 30 cents per hour cost of living adjustment. The value of the concession was about $1,000,000. Most recently, in March 1983, the employees agreed to reduce wages, on a temporary basis, from $10.24 per hour to $7.24, with an additional 10 cents per hour going to ESOP and 40 cents to capital expenditure fund. This deferral saved the company an estimated $5,600,000 during 1983.

During this period of concessions, the company's major lender—Security Pacific— became concerned with the continuing loss. In February 1983, a meeting between Rath and Security Pacific was held. The critical discussion at the meeting focused on the company's $20,000,000 line of credit. According to Taylor, the lender was "not satisfied with the progress or the profits of the company . . . and suggested that Rath . . . get some type of crisis management team . . . to evaluate the company." The accounting firm of Price Waterhouse was retained, pursuant to a unanimous vote by the Board, to conduct a management study. A final report, termed the "Crisis Management Report" (Report) was produced in April 1983.

The Report, admitted into evidence as Plaintiff Exhibit 9, contains various discussions and recommendations designed to restore profitability.² As indicated above, the Report is the result of a study conducted by a "Crisis Management Committee," which was organized after the meeting between Rath and Security Pacific. Concerning the collective bargaining agreement, the Report stated that the Committee took the view that "for . . . purposes of the study . . ., there should be no constraints on ideas or programs due to past or present conflicts with the master labor agreement."

The Report also made the observation that "Rath . . ., as it is currently operated and experiencing substantial losses, is not a viable long-term competitor in the meat-packing industry." Further, the Report stated that the "company has been primarily concerned with retaining a strategic status quo, presumably to preserve jobs and avoid further labor/management confrontations." Concerning plant operations, the Report observed that Rath "is . . . heavily burdened by restrictive work rules in many plants." Referring specifically to Rath's health care plan for the employees,³ the Report observed:

The plans provide comprehensive medical, dental, vision care, and prescription drug benefits. The plans are generally characterized by first dollar coverage, minimal coinsurance and deductibles, and few employee contributions (even for dependent coverage). This "first dollar" structure increases plan costs because all or almost all employees are likely to incur covered expenses each year. It is also ineffective as risk insurance because it reimburses employees for items that the employee can afford without substantial financial hardship. In addition, the plans contain few, if any, incentives for employees to choose less expensive forms of health care, such as outpatient surgery.

* * * * * *

At the same time, the plans do not provide the unlimited coverage that is essential for such catastrophes as brain or spinal injury, amputations, or birth defects. As a result, the plans do not provide adequate insurance against those risks that no employee or retiree can afford to bear. This is a serious defect, especially because the cost of catastrophic protection is low.

Health care costs can be cut while producing better health insurance

The cost of Rath\'s medical benefits program can be reduced significantly while at the same time providing employees and retirees with the catastrophic coverage that they now

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