Matter of McLouth Steel Corp.
| Decision Date | 20 September 1982 |
| Docket Number | Bankruptcy No. 81-07001-W. |
| Citation | 23 BR 167 |
| Parties | In the Matter of McLOUTH STEEL CORPORATION, Debtor. |
| Court | U.S. Bankruptcy Court — Eastern District of Michigan |
Timothy H. Howlett, Detroit, Mich., for McLouth.
Allen J. Kovinsky, Southfield, Mich., for Committee of Retirees.
This matter comes before the Court on the petition of the McLouth Steel Salaried Employees Committee of Retirees (Committee) for the payment of medical and life insurance benefits.
McLouth Steel Corporation (McLouth) filed for relief under Chapter 11 on December 8, 1981. On March 29, 1982, McLouth, as debtor in possession, entered into an operating agreement with its secured lenders.
As a condition to extending the operating agreement, the secured lenders required McLouth to retain essential management personnel. On May 14, 1982, a Court order was entered authorizing McLouth to offer employment contracts to essential employees. The contracts provide for the payment of lump sum incentive benefits to the employees upon completion of their employment with McLouth. The total of the lump sum incentive payments will aggregate $700,000.00.
McLouth sought to provide payments in a comparable aggregate amount to its union employees. On May 14, 1982, a Court order was entered authorizing McLouth to pay costs of $700,000.00 associated with the granting of a one week vacation to each of its eligible union employees and the purchasing of medical and life insurance coverage for its union retirees. The allocation of the funds was determined by agreement with the union.
On July 26, 1982, the Committee brought a petition for the payment of medical and life insurance benefits to salaried retirees.1 The Committee raises three arguments in support of its petition. The first is based on an alleged violation of equal protection; the second on a claim of breach of contract and fraudulent inducement; the third on the necessity of preliminary relief.
The Committee argues that the Bankruptcy Court and the secured creditors' committee, acting under the authority of the Bankruptcy Court, have violated the Fifth Amendment by allowing benefits to union retirees while denying benefits to salaried retirees.
The Fifth Amendment prohibits discrimination that violates due process. Davis v. Passman, 442 U.S. 228, 99 S.Ct. 2264, 60 L.Ed.2d 846 (1979); Johnson v. Robison, 415 U.S. 361, 94 S.Ct. 1160, 39 L.Ed.2d 389 (1974). Nevertheless, the due process clause of the Fifth Amendment encompasses a federal action requirement. Public Utilities v. Pollack, 343 U.S. 451, 72 S.Ct. 813, 96 L.Ed.2d 1068 (1952). The standards utilized to determine federal action are identical to those employed to establish state action under the Fourteenth Amendment. Johnson, supra.
The general rule with regard to the nexus between courts and the state action requirement is that "the mere availability of a forum for the resolution of private conflicts does not clothe private litigants with the authority of the state." Henry v. First National Bank of Clarksdale, 595 F.2d 291, 296, rehearing denied, 601 F.2d 586 (5th Cir. 1979). See also, Louisville Area Interfaith Committee v. Nottingham Liquors, 542 F.2d 652 (6th Cir. 1976); United Mine Workers of America, Inc. v. Wellmore Coal Corporation, 609 F.2d 1083 (4th Cir. 1979); Harley v. Oliver, 539 F.2d 1143 (8th Cir. 1976); Grow v. Fisher, 523 F.2d 875 (7th Cir. 1975); Glaspoole v. Albertson, 491 F.2d 1090 (8th Cir. 1974); Stevens v. Frick, 372 F.2d 378 (2d Cir. 1967), cert. denied, 387 U.S. 920, 87 S.Ct. 2034, 18 L.Ed.2d 973 (1967); Fallis v. Dunbar, 386 F.Supp. 1117 (N.D.Ohio 1974), aff'd., 532 F.2d 1061 (6th Cir. 1976). The Fifth Circuit has carved out an exception to the general rule, distinguishing the situation where a private party has procured a judgment and is able to enlist the power of the state on his behalf in enforcing that judgment. Henry, supra.2 See also, Bergstrom v. Bergstrom, 478 F.Supp. 434 (D.C.N.D.1979) vacated on other grounds, 623 F.2d 517 (8th Cir. 1980).
The Sixth Circuit has not addressed the Henry exception; it has, however, applied the general rule.
In Louisville Area Interfaith Committee, supra, plaintiff sought relief on a claim of deprivation of constitutional rights arising out of a state court order restraining it from the mass picketing of defendant's business premises. The District Court granted defendant's motion to dismiss. The Sixth Circuit affirmed, ruling that the initiation of state court proceedings did not constitute state action.
In Fallis, supra, townhouse tenants brought an action to enjoin owners of a housing complex from prosecuting an eviction action. Plaintiffs argued that the Supreme Court opinion of Shelley v. Kraemer, 334 U.S. 1, 68 S.Ct. 836, 92 L.Ed. 1161 (1948), compelled the conclusion that the application of state law in suits between private persons constituted state action. The District Court concluded that the rule of Shelley did not extend to the degree urged by plaintiffs. The Court reasoned:
The Court is compelled to reject plaintiffs\' argument concerning the extent of the Shelley v. Kraemer rationale. First, Shelley v. Kraemer required the state court to find that the prospective buyer was black and that the restrictive covenant being enforced was racially restrictive. The parties necessarily made the state court privy to the discriminatory purpose. No such compelling facts exist in the present case, as the Ohio eviction procedure merely affords the landlord a method of vindicating his property rights without inquiring into his motive for bringing the suit. A second reason for limiting the Shelley v. Kraemer rule is the danger which the use of that doctrine poses as a precedent. A logical extension of the doctrine would result in a federal cause of action existing whenever any state police power is used by private persons where constitutionally protected rights are involved. It could logically apply where a proprietor seeks to remove with police assistance a person from his private property because of what the person is saying. Such an extension has so great an application to purely private actions as to be overbroad. The Court therefore finds that filing an eviction action in state court is not action by the defendant under color of state law within § 1983 and plaintiffs have thus failed to state a claim upon which relief can be granted under § 1983.
386 F.Supp. at 1120-1121 (footnote omitted). The Sixth Circuit affirmed, holding that filing an eviction proceeding was not equivalent to state action. 532 F.2d at 1061.3
The Committee relies solely on Shelley to support its contention that orders of the Court constitute governmental action. The Court, however, finds the two-part analysis of the Northern District of Ohio in Fallis persuasive. The instant case is distinguishable from Shelley in that the Court has not been made privy to any discriminatory purpose on the part of McLouth. Additionally, the Court is cognizant of the dangers inherent in extending the Shelley v. Kraemer rule to the degree proposed by the Committee.
Even assuming arguendo that governmental action is present, the Committee has failed to present evidence of an equal protection violation. Equal protection analysis involves the application of a two-tiered standard.
The strict scrutiny standard is utilized in cases where governmental action impairs a fundamental constitutional right or involves a suspect class. In such instances, the Court subjects the challenged action or legislation to strict judicial scrutiny. In Re Bradford, 14 B.R. 722 (Bkrtcy.N.D.Ill. 1981). Fundamental rights include marriage, procreation, voting, the First Amendment rights of free speech, press and assembly, and interstate travel. In Re Purdy, 16 B.R. 860 (Bkrtcy.N.D.Ga.1981).4
In all other cases, the rational justification standard is utilized. Under the rational justification test, the action challenged need only be rationally based or free from invidious discrimination. Bradford, supra.5 The rational justification test applies to government action and legislation affecting economics and social welfare. See In Re Leyba, 12 B.R. 773 (Bkrtcy.D. Colo.1981). In United States v. Kras, 409 U.S. 434, 446, 93 S.Ct. 631, 34 L.Ed.2d 626 (1973), the Supreme Court observed:
Bankruptcy legislation is in the area of economics and social welfare. This being so, the applicable standard, in measuring the propriety of Congress\' classification, is that of rational relationship.
The Committee asserts that the present action involves their decision not to join a union and, consequently, their First Amendment right of association. Alternatively, the Committee contends that McLouth has failed to demonstrate a reasonable basis for the actions of the secured creditors' committee and the Bankruptcy Court. The Court disagrees.
The First Amendment protects the freedom "not to be required to associate" with the same degree of force with which it protects the freedom of association itself. Kolinske v. International Union, UAW, 530 F.Supp. 728 (D.C.1982). However, the present action involves orders of the Bankruptcy Court authorizing a debtor in possession to provide salaried employees with lump sum incentive benefits, union employees with a one week vacation, and union retirees with medical and life insurance benefits. As such, the action is in the area of economic and social welfare. Therefore, the applicable standard is that of rational justification.
A rational justification may result in some inequality. Dandridge v. Williams, 397 U.S. 471, 90 S.Ct. 1153, 25 L.Ed.2d 491 (1970), rehearing denied, 398 U.S. 914, 90 S.Ct. 1684, 26 L.Ed.2d 80 (1970). McLouth allocated $700,000.00 to its salaried employees and $700,000.00 to its union employees and retirees. The action was rationally based on the compelling need of McLouth to retain adequate personnel to...
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