Roth American, Inc., In re
| Decision Date | 03 September 1992 |
| Docket Number | No. 91-5564,No. 401,401,91-5564 |
| Citation | 975 F.2d 949 |
| Parties | 141 L.R.R.M. (BNA) 2218, 123 Lab.Cas. P 10,346, 27 Collier Bankr.Cas.2d 1125, 23 Bankr.Ct.Dec. 669, Bankr. L. Rep. P 74,824 In re ROTH AMERICAN, INC., Debtor. Teamsters Local UnionHealth & Welfare Fund International Brotherhood of Teamsters, Local 401, Appellant. |
| Court | U.S. Court of Appeals — Third Circuit |
Patrick J. Szymanski (argued), Christy Concannon, Baptiste & Wilder P.C., Washington, D.C., John J. Dunn, Sr., Dunn & Byrne Law Offices, Scranton, Pa., for appellant.
Robert C. Nowalis (argued), Doran & Nowalis, Wilkes-Barre, Pa., for appellee.
Before: SLOVITER, Chief Judge, STAPLETON and SEITZ, Circuit Judges.
Before us is an appeal by the International Brotherhood of Teamsters Local 401 (the Union) from a district court order that affirmed a bankruptcy court order (1) rejecting the Union's claim for unearned wages for breach of a post-petition agreement to maintain operations for two years, and (2) ruling that the Union's claims for severance pay and vacation pay against a Chapter 11 debtor, Roth American, Inc., were entitled to an administrative priority only to the extent that these benefits were earned post-petition.
Roth American, Inc., was a manufacturer of toys and gym sets in Wilkes-Barre, Pennsylvania, employing over 200 persons who were represented by Teamsters Local 401. In 1985, the company and the Union entered into a collective bargaining agreement covering the period from November 1, 1985 until June 30, 1988.
On February 2, 1988, Roth American filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code. In the meantime, Roth American had negotiated with the Union to obtain a modification of the collective bargaining agreement that was embodied in a separate memorandum of agreement. The 1988 memorandum of agreement, which became effective on February 4, 1988, 1 extended the existing collective bargaining agreement until January 1, 1989 and provided for a reduction in wages of seventy cents per hour across the board. Of particular importance to this appeal, it also provided:
The Employer will maintain the 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 those facilities will not be moved from the Wilkes-Barre area.
App. at 27. Neither party sought approval of the new agreement from the bankruptcy court, nor was there any hearing before the bankruptcy court at which creditors could object to the new agreement.
Despite the seventy cent wage concession provided in the 1988 memorandum agreement, the employer only paid the lower wage for a two-week period. It resumed paying the preexisting higher wage when it could no longer provide the health insurance coverage mandated by the memorandum agreement.
Roth American continued its operations for several months following the bankruptcy petition. In April 1988, the company entered into a contract, approved by the bankruptcy court, whereby the Michael Fox Company would solicit bids for the company initially in its entirety and, if that were unsuccessful, in its various parts. On June 5, 1988, Roth American ceased all manufacturing activity and laid off all its employees. On August 17, 1988, the bankruptcy court approved, over the Union's objection, the piecemeal sale of Roth American pursuant to the best bids that were received.
The Union filed three proofs of claim in the bankruptcy proceeding on behalf of the Roth American employees it represented. One claim sought damages of approximately $6.5 million in future wages and benefits for breach of the provision in the February 1988 memorandum agreement to maintain operations in Wilkes-Barre for at least two years. The other two claims were for approximately $246,000 in vacation pay and approximately $105,000 in severance pay due the employees under the terms of the 1985 collective bargaining agreement.
The bankruptcy court granted the Union's claim for damages for breach of contract only to the extent of the reduction in wages the employees were paid during the two week period following the new agreement. 120 B.R. 356. The bankruptcy court reasoned that because the 1988 memorandum agreement "was not accepted or rejected under the terms of the United States Bankruptcy Code," it was not "a valid post-petition Collective Bargaining Agreement." App. at 216. Alternatively, the court reasoned that the 1985 Collective Bargaining Agreement did not "provide any guarantees of continued employment," and therefore could not give rise to a claim for future unearned wages. App. at 218. Accordingly, the court held that since "[t]he employees received all their post-petition wages in full except for a two week period in which they were paid less than the amount called for in the Collective Bargaining Agreement[, t]his is the only measure of damages available to the Union." Id.
The bankruptcy court further ruled that the Union's claims for severance pay and vacation pay under the 1985 agreement were allowable, but that administrative expense priority would be accorded those claims "only for the amount of severance and vacation pay earned post-petition." App. at 210. The remainder of these claims were "divided into either a priority or unsecured claim as the Bankruptcy Code dictates," id., signifying that the amounts earned within 90 days of the bankruptcy filing up to $2,000 per individual would get third priority under 11 U.S.C. § 507(a)(3), and the remainder would be accorded general unsecured claim status.
The Union appealed the bankruptcy court's decision to the United States District Court for the Middle District of Pennsylvania, which affirmed the bankruptcy court's decision in all respects. The district court agreed with the bankruptcy court that the 1988 memorandum agreement was not valid, reasoning that the enactment of 11 U.S.C. § 1113 demonstrated that "post-petition activity with respect to collective bargaining agreements are not transactions in the ordinary course of business and require a modicum of Bankruptcy Court supervision." App. at 240. Alternatively, the court stated that even if the 1988 memorandum agreement were enforceable, the language in that agreement did not guarantee future employment and therefore could not give rise to a claim for future unearned wages and benefits. The district court also agreed with the bankruptcy court's analysis of the priority to be accorded the Union's vacation pay and severance pay claims, reasoning that nothing in 11 U.S.C. § 1113 was intended to alter the priority to be accorded such claims.
On this appeal, the Union argues that the 1988 memorandum agreement was a transaction in the "ordinary course of business" within the meaning of 11 U.S.C. § 363(c) and that therefore a hearing before the bankruptcy court was not required for the agreement to be fully enforceable. The Union also contends that the bankruptcy court erred in not granting the full amount of its claims for severance pay and vacation pay first priority as administrative expenses.
We have appellate jurisdiction pursuant to 28 U.S.C. § 158(d) (1988). Our review of the district court's decision "effectively amounts to review of the bankruptcy court's opinion in the first instance." In re Sharon Steel Corp., 871 F.2d 1217, 1222 (3d Cir.1989). We have plenary review over the interpretation of the provisions of the Bankruptcy Code. See In re Abbotts Dairies, 788 F.2d 143, 147 (3d Cir.1986).
The validity of the Union's claim for breach of the 1988 memorandum agreement turns on whether notice to creditors and a hearing before the bankruptcy court were required for the 1988 memorandum agreement to be enforceable. Only if the agreement is enforceable, would we need to answer the extent to which the Union is entitled to damages for its breach.
Section 363(c)(1) of the Bankruptcy Code provides:
If the business of the debtor is authorized to be operated under section ... 1108 ... of this title and unless the court orders otherwise, the trustee may enter into transactions ... in the ordinary course of business, without notice or a hearing, and may use property of the estate in the ordinary course of business without notice or a hearing.
11 U.S.C. § 363(c)(1) (1988) (emphasis added). 2 In contrast, a notice and hearing are required before the trustee (or debtor-in-possession) may use property of the estate other than in the ordinary course of business. 11 U.S.C. § 363(b)(1). 3
The framework of section 363 is designed to allow a trustee (or debtor-in-possession) the flexibility to engage in ordinary transactions without unnecessary creditor and bankruptcy court oversight, while protecting creditors by giving them an opportunity to be heard when transactions are not ordinary. See United States ex rel. Harrison v. Estate of Deutscher (In re H & S Transp. Co.), 115 B.R. 592, 599 (M.D.Tenn.1990) (). Creditors are not given the right to notice and a hearing when transactions are in the ordinary course of business "because their objections to such transactions are likely to relate to the bankrupt's chapter 11 status, not the particular transactions themselves." In re James A. Phillips, Inc., 29 B.R. 391, 394 (S.D.N.Y.1983).
Neither the Bankruptcy Code nor its legislative history provides a framework for analyzing whether particular transactions are in the ordinary course of...
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