In re Roth American, Inc.

• Decision Date: 12 October 1990
• Docket Number: Bankruptcy No. 5-88-00056.
• Citation: In re Roth American, Inc., 120 B.R. 356 (Bankr. M.D. Pa. 1990)
• Parties: In re ROTH AMERICAN, INC.
• Court: U.S. Bankruptcy Court — Middle District of Pennsylvania

120 B.R. 356 (1990)

In re ROTH AMERICAN, INC.

Bankruptcy No. 5-88-00056.

United States Bankruptcy Court, M.D. Pennsylvania.

October 12, 1990.

John H. Doran, Robert C. Nowalis, Doran & Nowalis, Wilkes-Barre, Pa., for Roth American.

Jeffrey Baddeley, Squire, Sanders & Dempsey, Cleveland, Ohio, for Unsecured Creditors Committee.

Patrick J. Szymanski, Christy Concannon, Baptiste & Wilder, P.C., Washington, D.C., John J. Dunn, Sr., Dunn & Byrne, Scranton, Pa., for Teamsters Local 401.

MEMORANDUM AND ORDER

THOMAS C. GIBBONS, Bankruptcy Judge:

Before the Court for determination are objections by the debtor, Roth American, Inc. (hereinafter "debtor") to three proofs of claim filed on behalf of former employees of the debtor represented by Local Union No. 401 of the International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America, (hereinafter "Union"). Two of the proofs of claim, namely Claims # 204 and # 205, seek administrative priority status for severance pay and vacation pay respectfully. Claim # 151 requests a breach of contract claim in the amount of $6,569,536.46. For the reasons provided herein, we find that Claims # 204 and # 205 will be accorded administrative priority only for the amount of severance and vacation pay earned post-petition and the portion of each claim earned pre-petition will be divided into either a priority or unsecured claim as the Bankruptcy Code dictates; and that Claim # 151 is granted only to the extent of the difference between the reduced wages the employees earned during a two week postpetition period and the wages actually called for in the Collective Bargaining Agreement.

Before proceeding to the substantive issues, we note that at a hearing on the objections the parties stipulated as to the amount of severance and vacation pay each employee would receive and further agreed as to how each severance and vacation calculation would be divided into unsecured, priority or administrative status. These agreements were contingent on the Court's acceptance of the debtor's theory of law as applied to the facts of this case. We accept the calculations stipulated by the parties and found in Debtor's Exhibit 1 as submitted into evidence at time of hearing. The parties did not reach an agreement concerning the severance pay for four employees, namely, Thomas Comitz, James Grilz, James O'Day, Sr., and Louis Caskey, but indicated they would continue discovery and reach an agreement as to whether these employees would receive any severance pay. The reasoning of this Opinion will apply and if severance and vacation pay is due these employees, it will be calculated on the same basis.

The facts are as follows. Debtor was a toy manufacturing company which employed in excess of 200 employees represented by the Union. Both parties operated under a Collective Bargaining Agreement effective from November 1, 1985 through June 30, 1988. This Agreement required the debtor to pay the employees, depending on length of service, from one to four weeks of vacation pay on July 1 of each year and further, again depending on length of service, from one to fifteen days of severance pay in the event of dissolution or transfer of the business outside of the principal location of the business. All manufacturing operations ceased in January of 1988 after a determination that the debtor was in default under various terms of its loan agreement with its primary secured creditor. Thereafter, in an attempt to reactivate the business, the parties entered into a "Memorandum of Agreement" (hereinafter "Memorandum") which, inter alia, provided that the debtor would maintain operations in its current location for a minimum of two years and also called for a temporary reduction of the employees' hourly wage. The parties agreed that the Memorandum would not be effective until each representative of the Union and the debtor had signed the Memorandum. The debtor filed its Chapter 11 petition on February 2, 1988. The last signature was placed on the Memorandum on February 4, 1988. The debtor resumed its manufacturing activities and operated under the terms of the Memorandum for only a two week period and at all other times, the debtor and the Union operated under the Collective Bargaining Agreement until the debtor ceased operations on June 5, 1988. At no time during the course of the Chapter 11 proceeding did the debtor seek to reject or assume the Collective Bargaining Agreement and Memorandum pursuant to the terms of the Bankruptcy Code.

The Union maintains that the Memorandum is a Collective Bargaining Agreement and binding on the debtor. The Union, however, also maintains that this Memorandum modified the original Collective Bargaining Agreement which is also binding upon the debtor. The Union argues that the Bankruptcy Code requires the debtor to pay all of the accrued vacation and severance pay due under both the Collective Bargaining Agreement and the Memorandum as administrative expenses. Finally, the Union argues that pursuant to the Memorandum the debtor was to remain in business for a period of two years commencing on the date of the Memorandum and, therefore, the Union employees are entitled to damages for a breach of that contract for the amount of lost wages less interim earnings for a total in excess of $6,569,000.

The debtor counters these arguments by asserting that only that portion of the employee's vacation and severance pay earned between the date of the filing of the petition and the date of cessation of business should be accorded administrative expense status. Debtor urges that all the prepetition severance and vacation pay should be paid under the dictates of the Bankruptcy Code as either an unsecured prepetition debt or priority vacation and severance pay earned within 90 days prior to the bankruptcy filing.

DISCUSSION

We will initially discuss the Union's claim under # 151 for lost earnings approximating $6,569,000. The Union argues that the Memorandum which was finalized by signature of a representative of the debtor on February 4, 1988 is a Collective Bargaining Agreement negotiated in good faith between an employer and the Union. Further, the debtor argues that the purpose of the Memorandum was to modify and extend the 1985-1988 Collective Bargaining Agreement. See Union's Memorandum at page 11. Union asserts that both the Memorandum and the 1985-1988 Collective Bargaining Agreement are binding on the debtor as collective bargaining agreements. The argument continues that it is settled under § 1113 of the United States Bankruptcy Code that collective bargaining agreements are binding on the debtor unless they are rejected. In support, the Union relies on In re Unimet Corporation, 842 F.2d 879 (6th Cir.), cert denied, 488 U.S. 828, 109 S.Ct. 81, 102 L.Ed.2d 57 (1988). The Union further claims that the debtor assumed the 1985-1988 Collective Bargaining Agreement and that negotiating and ratifying the new Memorandum did not require notice or hearing before the Court because it was part of the normal course of business. The Union then draws our attention to the Memorandum and in particular, Paragraph 2(a) which provides as follows:

"The employer will maintain operations covered by the current collective bargaining agreement in the Wilkes-Barre area for a minimum of two (2) years, commencing upon the effective date of this Memorandum of Agreement.

This commitment also includes the representation that equipment necessary to the operations of these facilities will not be moved from the Wilkes-Barre area."

The Union argues that the debtor was obligated to maintain operations in the Wilkes-Barre area for two years and because of the breach of this Memorandum the debtor owes the Union employees wages in excess of $6 Million from June of 1988 (date debtor ceased operations) through February 4, 1990 (two years from date of signing of Memorandum). We note that the Union does not claim that the debtor did not fully perform under the Collective Bargaining Agreement. The debtor proceeded postpetition under the terms of the Collective Bargaining Agreement for the entire period prior to closing except for a two week period in which employees were paid at a reduced hourly rate. The debtor, however, contests that the Memorandum is binding on the debtor and that, therefore, there is no breach of contract giving rise to the amount of damages claimed by the Union. In short, the debtor claims that the Memorandum was not a Collective Bargaining Agreement and was never assumed. Consequently, the only damages to be awarded postpetition are for the two week period when the employees were paid at a reduced hourly rate. Further, the debtor argues that both the Collective Bargaining Agreement and the Memorandum do not guarantee employment for the Union employees.

In one segment of the Union's argument they claim that the debtor has authority to enter into a Collective Bargaining Agreement in the ordinary course of business without notice and hearing. (Citations omitted). However, the Union also argues that it is well settled that Section 1113 of the Bankruptcy Code makes a Collective Bargaining Agreement binding on the debtor unless rejected and further that Section 1113 permits the debtor to reject or accept a Collective Bargaining Agreement only through a very specific procedure. See Union's Memorandum at pp. 13 and 14. The argument continues that because both Agreements were assumed payments due under these agreements are given administrative priority under § 503. The debtor concedes that the employees have a valid enforceable claim in the Chapter 11, but all payments should be made under the applicable provisions of the Bankruptcy Code and, in particular, §§ 503 and 507(a) which provide the scheme of treatment of pre-petition and postpetition claims including priority and administrative expenses.

This is not the first court to be presented with this conflict and we direct the parties...