Appeal from a judgment of the United States District Court for the District of Connecticut (Cabranes, J.) that affirmed an order of the Bankruptcy Court (Kreckevsky, B.J.) of July 26, 1985 allowing appellee, Century Brass Products, Inc., to reject a collective bargaining agreement it had with appellant, International Union, United Automobile, Aerospace and Agricultural Implement Workers of America, and its Local 1604, in a bankruptcy reorganization pursuant to 11 U.S.C. § 1113 (Supp. II 1984). Appellant union argued that it could not adequately represent the interest of appellee's retired employees.
Kaufman and Cardamone, Circuit Judges, and Wyzanski, District Judge.*fn*
CARDAMONE, Circuit Judge:
This appeal deals with one aspect of the existing tension between the Bankruptcy Code and the National Labor Relations Act. Today companies in financial distress often look to the bankruptcy court for protection from deregulation, litigation, ruinous international competition and other economic hardships. Under Chapter 11 of the Code a debtor may be allowed to modify its existing labor agreements and thereby reduce costs. On the other hand, to permit the unilateral rejection by an employer of a bargained-for agreement flaunts national labor policy. On February 22, 1984 the Supreme Court decided NLRB v. Bildisco & Bildisco, 465 U.S. 513, 79 L. Ed. 2d 482, 104 S. Ct. 1188 (1984), which held that a debtor in bankruptcy did not commit an unfair labor practice by unilaterally terminating provisions of a collective bargaining agreement. The decision sparked intense congressional debate regarding the circumstances under which an existing labor contract could be rejected in Chapter 11 cases.
The institutional tension between labor and bankruptcy law culminated in the Senate when two bills were introduced: the first sponsored by Senator Packwood was hostile to the notion that employers in bankruptcy could unilaterally reject collective bargaining agreements or make more than minimal modifications in order to permit reorganization; the second presented by Senator Thurmond favored a debtor's power to avoid its agreement, although not unilaterally for 30 days. A House-Senate Conference Report adopted a compromise approach to the conflict by overruling the unilateral power to reject given the debtor in Bildisco, and by setting forth certain requirements to be met before rejection of a collective bargaining agreement. The Report was passed overwhelmingly in both Houses and signed into law by the President on July 10, 1984. See Rosenberg, Bankruptcy and the Collective Bargaining Agreement -- A Brief Lesson in the Use of the Constitutional System of Checks and Balances, 58 Am. Bankr. L.J. 293, 308-21 (1984).
Here a union challenges the scope of a bankruptcy court's authority under the new law, 11 U.S.C. § 1113 (Supp. II 1984),*fn1 to allow a Chapter 11 debtor to propose modifications of vested retiree health insurance benefits and -- upon the union's refusal to bargain on this issue -- to reject the collective bargaining agreement. Throughout this litigation the union has maintained that it is not the retirees' "authorized representative," and that the debtor is required to negotiate any changes in vested benefits directly with the retirees so as to obtain their consent. The union contends that because the debtor insisted on bargaining over retiree benefits it violated the good faith requirement of § 1113. As a result, the union argues that it had "good cause" to reject the debtor's proposal.
The bankruptcy and district courts both found that the debtor's proposal to the union to eliminate vested retiree benefits did not constitute a sufficient basis to prevent the debtor from rejecting the labor agreement under § 1113. We agree that vested retiree insurance benefits are a proper subject of bargaining. But since a conflict of interest between active employees and retirees precludes the union from representing both, we remand the case to the bankruptcy court so that it can appoint a representative for the retirees in these negotiations.
Century Brass Products, Inc. (Century, company, or debtor) came into existence in 1976 when it purchased the major assets of the Scovill Manufacturing Company located in Waterbury and New Milford, Connecticut. Included in the sale were a metals and a general products divisions; the former operated brass mills and the latter manufactured products for the automotive industry and the United States' military program. The purchase price was $30 million, $12 million of which was paid in cash. The remainder was accounted for by the Company's assumption of Scovill's $18 million vested pension and insurance obligations due its hourly and salaried employees.
Since 1976 Century has recognized the International Union, United Automobile, Aerospace & Agricultural Implement Workers of America (UAW) and its Local 1604 (collectively referred to as the Union) "for the purpose of collective bargaining in respect of wages, rates of pay, hours of employment, and other conditions of employment . . . as the sole and exclusive representative of all hourly and incentive paid production and maintenance employees employed in the metals division including the New Milford plant, the General Products division, and Waterbury services." Following the acquisition, Century and the Union entered into a series of collective bargaining agreements.
From the time of acquisition, Century experienced a downturn in business precipitated primarily by worldwide events that had a negative impact on the American brass industry. Operating losses were incurred for the fiscal years ending in April 1980-1983. The 1983 loss exceeded $9 million. In fiscal year 1984 Century realized a minimal profit of $523,704 on sales of $141 million, with this small profit due in large part to an insurance settlement. By February 1985 the availability of cash under its financing arrangement approached zero. To deal with its urgent need for operating funds, Century devised plans to reduce operating costs.
Those salaried employees not represented by the Union agreed to wage and benefit reductions totaling $2.3 million. Coupled with this, Century's president met with the UAW on February 25, 1985 to discuss wage and benefit concessions. The company emphasized that unless the UAW agreed to a $2.5 million reduction, the historically unprofitable metals division would be closed. Were this to occur, the inevitable transfer of overhead expenses to the general products division would then jeopardize its existence. On March 3, 1985 the UAW members voted to reject any modifications of the collective bargaining agreement. The following day Century closed the metals division and laid off 700 employees. Attempts by a local Congressman and the Mayor of Waterbury to resolve the conflict were unavailing.
Shortly thereafter, Connecticut Light & Power Company told Century that its electrical power would be turned off in 15 days unless an overdue payment of $2.5 million was made together with a one-month deposit. Connecticut Power also attached Century's bank accounts. On March 15, 1985 Century filed a bankruptcy petition under Chapter 11. Scheduled liabilities totaled over $103 million, while assets listed in the petition amounted to only $71 million. A loss of $7 million was projected for the fiscal year ending April 30, 1985 with anticipated net sales of $62 million and costs of approximately $69 million. The bankruptcy court found that Century faced $40 million of non-modifiable expenses, leaving $22 million for payment of wages and benefits to all of its non-union salaried and bargaining unit employees. Labor costs under the existing collective bargaining agreement amounted to $19,912,000. Thus, were Century unable to modify its labor agreement, it would be forced to reduce its non-union salaried employees' wages from over $9 million to about $2 million.
After filing its Chapter 11 petition Century initiated a series of meetings with the UAW to discuss the changes essential to the survival of the general products division and to answer questions regarding its Chapter 11 petition. During these informal negotiations held on April 3, 9 and 10, 1985, Century raised the possibility of terminating the pension plan, which cost it approximately $3 million annually. The UAW rejected this proposal. By letter dated April 16 Century's vice president for corporate services requested a formal negotiating session. Century and the UAW negotiating committees met again on April 23.
At this meeting, the company again proposed the following modifications of the collective bargaining agreement: termination of the existing pension plan and institution of a new plan, changes in the medical plan through the addition of a deductible and/or employee contributions, waiver of negotiated changes in wages for 1985 and 1986, and a new vacation plan. The UAW responded that the retiree insurance benefits for those already retired were vested and of lifetime duration.*fn2 As a consequence, the Union maintained that it could not negotiate these benefits through collective bargaining. Rather, if Century wanted to reduce those benefits, direct negotiation with the retirees to obtain their consent was necessary. On April 26 the UAW and Century met with officials of the Pension Benefit Guaranty Corporation (PBGC) and were advised as to the benefits the PBGC would guarantee to eligible persons should the existing plan be terminated.*fn3
The debtor provided the UAW with information on April 29 that detailed the status of the company, its financial data, and its proposed resolution of various operational problems. The parties met again on April 30, May 8, and May 13. The Union reiterated that it could not consider any proposal involving modification of retirees' benefits. At the May 8 meeting Century presented an economic proposal that was part of an overall plan to reduce its projected losses from $7 million in the ensuing year to a profit of $287,000 on sales of $62 million. The proposal called for contract modifications and the termination of vested retiree insurance benefits. The UAW wanted retiree insurance benefit reductions removed as a topic of negotiation. In response, Century presented a revised topic proposal at the final pre-hearing negotiating session. Because the proposal still called for the complete elimination of retiree insurance benefits for approximately 700 pre-acquisition hourly retirees and for a significant reduction in the insurance benefits of 500 post-acquisition retirees, the UAW refused to take Century's offer to its active employee membership for a vote.
On May 17 Century filed the present application in the bankruptcy court for an order pursuant to § 1113 terminating its collective bargaining agreement with the UAW. The Union appeared and objected. From May 31 through July 12 hearings were held on the application. On July 26 the bankruptcy court (Krechevsky, B.J.) granted Century's application. On November 7 the United States District Court for the District ...