Hostess Brands, Inc.

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UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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In re: 	Chapter 11
HOSTESS BRANDS, INC., 	Case: 12-22052 (RDD)
Debtors.
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MODIFIED BENCH RULING ON THE MOTION OF THE BAKERY,
CONFECTIONARY, TOBACCO WORKERS AND GRAIN MILLERS
INTERNATIONAL UNION TO DISMISS FOR LACK OF SUBJECT MATTER
JURISDICTION
HON. ROBERT D. DRAIN, UNITED STATES BANKRUPTCY JUDGE:
I have before me the motion of the Bakery,
Confectionary, Tobacco Workers and Grain Millers
International Union -- or the Bakers' Union -- to dismiss
the 1113/1114 motion of the debtor for lack of subject
matter jurisdiction.
The motion is premised upon the Bakers' Union’s
view of the plain language of Section 1113 of the Bankruptcy
Code, which is the sole source to permit the rejection of a
collective bargaining agreement by the bankruptcy court.
The statute provides, in relevant part in Section
1113(a), that "The debtor in possession may assume or reject
a collective bargaining agreement only in accordance with
the provisions of this section." 	Sections (b) through (d) -
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- or subsections (b) through (d) of Section 1113, then set
forth the criteria and process for a debtor in possession's
rejection of a collective bargaining agreement.
And then Section 1113(f) provides that "no
provision of this title shall be construed to permit a
trustee" -- which is defined in Section 1113(a) as also
including a debtor in possession -- "to unilaterally
terminate or alter any provisions of a collective bargaining
agreement prior to compliance with the provisions of this
section."
In each instance of the sections that I've quoted
the statute refers to a “collective bargaining agreement.”
The Bakers' union asserts that now that its identified
collective bargaining agreements have expired, they are not
viewed under the law as “agreements,” but, rather, they are
viewed as setting forth terms that remain, in part, in
effect until the parties, in good faith, bargain to impasse,
at which point those terms are no longer in effect under the
NLRA, subject, of course, to either party's right to seek a
determination from the NLRB, and then, ultimately, through
the court process, that the other side had not bargained in
good faith to impasse.
The Bakers' union contends -- and I agree with it
-- that, technically speaking, that regime, that post-
expiration regime is not one in which the collective
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bargaining agreement itself governs, but, rather, that the
NLRB governs in a way that leaves key provisions, but not
all of the provisions, of the collective bargaining
agreement in effect under the law.
The debtors contend that in drafting Section
1113(a) through (d) and 1113(f) Congress meant more than
simply that collective bargaining agreement as a contract,
but also any of the debtor's obligations under that
agreement, including obligations to perform according to the
terms of the provisions of such agreement that are required
to be performed under the NLRA until good faith bargaining
to impasse.
Both sides have argued their positions effectively
and, frankly, there is considerable merit to each position.
The case law in this area is far from controlling. 	Both
sides have cited decisions that favor their respective
positions. 	The debtors rely, as far as decisions on point,
primarily upon In re Karykeion Inc., 435 B.R. 663 (Bankr.,
C.D. Cal. 2010).
In that decision Bankruptcy Judge Tighe agrees
with the debtor's view that the interpretation that the
Bakers' Union would impose on the statute would
impermissibly leave a debtor at the mercy of a non-
bankruptcy court-supervised - - and, necessarily, under the
statute -- rapid bargaining and decision-making process,
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instead subjecting them to the uncertainties of what Judge
Tighe refers to as "the more formal bargaining process"
under the NLRA, as informed by the risk of after-the-fact
sanction under Sections 8(a) and 8(d) of the NLRA.
The Karykeion opinion concludes that Congress must
not have meant to subject a debtor to that process when, in
essence, the key provisions of the collective bargaining
agreement are still in effect post-expiration. 	In support
of that view, Judge Tighe cites, as do the debtors, Section
1113(e) of the Bankruptcy Code which states, "If, during a
period when the collective bargaining agreement continues in
effect and if essential to the continuation of the debtor's
business, or in order to avoid irreparable damage to the
estate, the court, after notice and a hearing, may authorize
the trustee to implement interim changes in the terms,
conditions, wages and benefits or work rules provided by a
collective bargaining agreement. 	Any hearing under this
paragraph shall be scheduled in accordance with the needs of
the trustee. 	The implementation of such interim changes
shall not render the application for rejection moot."
Judge Tighe points out that the phrase "when the
bargaining agreement continues in effect" in Section 1113(e)
could easily be read to contemplate that the terms of the
agreement remain in effect or terms of the agreement as
opposed to the agreement remain in effect, which arguably is
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a fair layman’s summary of what happens after the expiration
of a collective bargaining agreement.
That view is buttressed by the fact that
Subsection 1113(e) refers to alterations only in respect of
conditions waived as benefits or work rules which, at least
based on my understanding, would be the types of provisions
that would be viewed as carrying on after expiration until
good faith bargaining to impasse.
The other decision relied upon by the debtor
dealing with a similar fact pattern is In re Ormet Corp.,
316 B.R. 662 (Bankr. S.D. Ohio 2004), in which the court
concluded, where the 1113 process started, as it did here,
with agreements still in effect and the agreements
subsequently expired before the process ended, "The debtors
should not be penalized for their diligent efforts over the
course of several months to make a proposal based on the
most complete and reliable information available, and to
provide the parties with all necessary information to
evaluate that proposal. 	The statute requires far less. 	The
debtors also should not have to risk being charged with an
unfair labor practice by declaring an impasse and
unilaterally making changes to the terms and conditions of
the parties' agreements without this Court approval.” 316
B.R. at 665.
Both of those decisions assume without any real
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evidence that there would, in fact, be a material difference
in the time within which a debtor could get comfort that the
proposed new terms for a collective bargaining agreement
could, in fact, be enforced without the risk of sanction.
They also assume, without any real evidence, that
the uncertainty of a subsequent NLRB determination and an
inevitable litigation -- which would probably end up with a
litigation at the federal court level under Section 8(a) or
8(d) of the NLRA -- would so chill the debtor’s
reorganization efforts and, in particular, the debtor's
efforts to raise exit financing or close a transaction
necessary to preserve the debtor's going concern value that
Congress would have meant when it referred to “a collective
bargaining agreement” in Sections 1113(a) through (d) and
(f) that it includes the collective bargaining agreement [in
effect] after its expiration.
It is not clear to me that, in fact, that would be
the case, however. 	Obviously, Congress imposed a rapid
bargaining process which, if the parties -- or one party --
does not pursue in good faith and which otherwise satisfies
the requirements of Section 1113 will lead to a court order
permitting the rejection of the collective bargaining
agreement. 	And, intuitively, I feel that the bargain to
impasse process outside of the 1113 process, under the NLRA,
could well be more lengthy or create more risk of
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uncertainty for prospective investors or acquirers of the
debtors as a going concern. 	But it is at this level only an
intuition. The debtor has not offered evidence on this
issue. 	It is a fact issue that for example, may lead to a
different result as between the NLRA and the RLA.
What is clear to me is that Congress created a sui
generis provision in Section 1113. 	As noted by the Second
Circuit in In re Northwest Airlines Corp., 483 F.3d. 160 (2d
Cir. 2007), the purpose of Section 1113 is different from
the statutory construct of Section 365 of the Bankruptcy
Code. 	It is a self-contained provision. 	Thus, as
interpreted by the Second Circuit in the Northwest Airlines
case, it provides for the abrogation of a collective
bargaining agreement, if the court grants the debtor's
motion, which if it's not on a consensual basis means that
the union does not have a breach claim, given that there is
no provision of Section 1113 that provides for such a claim
and Sections 365 and 502(g) govern only rejections of
current contracts under Section 365.
The debtor’s “policy and purpose” argument,
therefore, I believe is a stretch here. 	Clearly, there is a
unique purpose to Section 1113, and that unique purpose is
intended to provide for expedited, good faith bargaining
and, ultimately, a determination by the court, if that
doesn't occur. But I do not necessarily read in the statute
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a purpose extending it beyond the collective bargaining
agreement itself to discreet provisions of the agreement
that would remain, under the law, although not under the
agreement itself, in effect post-expiration.
In fact, I view the language in Section 1113(e) to
create a distinction between provisions that continue in
effect and the agreement as a whole. 	In construing the
statute, it would appear to me to be more reasonable to view
Section 1113(e) as an exception to Section 1113’s other
provisions that generally focus on the contract itself and
not on term that would be in effect, except for instances,
as set forth in 1113(e), where, if it is essential to the
continuation of the debtor's business, or in order to avoid
irreparable damage to the estate, the court may authorize,
on an interim basis, the implementation of interim changes
to terms, conditions, waives, benefits or work rules.
There are two cases, including one from this
district, that come very close to taking that view. 	(Of
course, one can distinguish each of them, as I'll point out
in a moment.)
But in both In re Chas. P. Young Company, 111 B.R.
410 (Bankr. S.D.N.Y. 1990) and In re D.O. & W. Coal Company,
93 B.R. 454 (W.D. Va. 1988), the court concluded that orders
under 1113(e) could continue to apply after the expiration
of the collective bargaining agreement. 	Now in each of
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those cases the court had already entered the order, so one
could distinguish those cases from the present facts in
saying that the court was continuing to implement an order
that the parties had relied upon. 	But I believe the rulings
go beyond that, particularly Judge Blackshear's ruling in
the Chas. P. Young case. I do so particularly because in
that case he recognized, consistent with pre-Section 1113
case law (but of course this was after the event under
Section 1113) that "rejection of the collective bargaining
agreement pursuant to Section 1113(b) and (c) is a moot
issue if the agreement expires by its own terms and before
the bankruptcy court has a hearing on rejection."
He was not alone in reaching that conclusion. 	It
was also reached after the enactment of Section 1113, albeit
in dicta, by the Ninth Circuit Bankruptcy Appellate Panel in
In re San Rafael Banking Company, 219 B.R. 860 (BAP 9th Cir.
1998). And it is stated by the editors of Colliers, albeit
that they rely upon some pre-Section 1113 authority as well,
that this is the majority view. 7 Collier on Bankruptcy
¶1113.02[1][d](16th ed. 2011).
But my conclusion here is not a matter of toting
up the cases that take the Bakers' union’s view of the
matter here and comparing them against the number of cases
that take the debtor's view.
My conclusion instead is based first on the plain
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language of Section 1113 as a whole and the distinction
between 1113(e) and 1113(a) through (d) and (f); and,
secondly, my view that, given the importance of Section 1113
and its visibility and the visibility of the issues it
relates to, I believe that Congress should be viewed as
going only as far as the plain language takes it in this
section, and that I should not presume to extend the
language in the way that the debtor asks to do to further a
policy concern, particularly where, again, the facts
allegedly supporting that policy argument are, I believe, on
this record no more than convincing at a merely intuitive
level.
I believe if I were to extend the language of
“collective bargaining agreement” to “collective bargaining
agreement in effect” or “collective bargaining agreement as
it covers the relations between the parties,” I would be
basing that conclusion on, first, a policy that is not well-
articulated or found in the statute itself. 	Secondly, I'm
of a view that as a factual matter I do not believe it has
been established that the post-expiration regime would so
interfere with whatever the congressional policy is behind
Section 1113 as to the negate, Congress's policy. 	This
result might be different if the CBAs were governed by the
RLA. 	See 7 Collier on Bankruptcy at ¶ 1113.07 [1][d]. 	And,
finally, I believe it would stretch the statute’s language
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too far.
As noted during oral argument, only certain
provisions of the collective bargaining agreement remain in
effect by operation of the NLRA. 	So it appears to me that,
absent consent, the agreement could not be assumed, since it
can only be assumed in toto, again, unless the parties agree
to amend it, and it is logical that an agreement that cannot
be assumed under Section 1113(a) (which uses the phrase
“assume or reject”), also cannot be rejected under Sections
1113(a) and (c),
Given the expiration of the agreement, I believe
that 1113 instead leaves the parties (except, I believe,
under 1113(e)) under the fallback provisions of otherwise
applicable law, including here, the NLRA.
Courts have found at times that that fallback
regime may assist the debtor in relieving the debtor of
certain claims. 	See, for example, In re CF&I Fabricators,
163 B.R. 858. 	appeal dismissed, 169 B.R. 984 (Bankr. D.
Utah 1993), but I don't believe Congress intended in this
provision, and certainly not consistent with the plain
language of the provision, to impose the rejection process
on parties to an already expired agreement.
As the debtors have noted, and as the Second
Circuit has noted in the Northwest case, except for its
expedited time frame, the requirements of Section 1113(a)
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through (d) contemplate bargaining in good faith to impasse
along with additional requirements going to the
reorganization and the equities. Those requirements, at
least the bargaining in good faith to impasse, I believe are
in complete overlap with the NLRA process. 	I find it hard
to believe that, as a legal matter, the NLRB and any
reviewing court would not take into account the context in
which the debtors and the Bakers' locals find themselves,
including the effect of uncertainty and the need for a quick
resolution in order to obtain exit financing for an
acquirer’s agreement to preserve the debtors as a going
concern as opposed to having a liquidation.
And for that reason, again, it is hard for me to
find such a clear dichotomy between the process that the
union says must apply here and what the debtor contends
Congress intended to apply under Section 1113 to require
that 1113 would apply even when an agreement has expired.
So, for those reasons, I will grant the Bakers'
unions’ motion and, Mr. Freund, you can submit an order
consistent with that ruling.
Dated: White Plains, New York
June 22, 2012
/s/Robert D. Drain
UNITED STATES BANKRUPTCY JUDGE
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